In-Service Dist.... penalty free?

[K-t-F]

I am being told there is a way for a participant of a plan... less than 59-1/2... to take an in-service dist without being assessed the 10% early dist penalty. I dont know of any such rule.... am I missing something or is my source wrong.

The participants who want to take the dist are active employees... active participants of the plan. They simply want to withdraw some of their plan balance to invest outside of the plan... roll the $ into IRAs and invest in real estate. The dist would be from a qualified plan and into an IRA. Not taken as cash. No Hardship... No disability... No RMD... simply want to take some $ out and invest outside the plan to keep the real estate investment outside the plan for admin reasons.

Thanks

[masteff]

Some plans allow for the in-service withdrawal of employer contributions, which generally can then be rolled over to an IRA. The plan document would have to specifically allow for this type of withdrawal. It cannot be used in a safe harbor plan as employer contributions are specifically restricted in those.

I do believe there's some small restrictions on employer contributions, two years of plan participation comes to mind, but don't hold me to that.

[JanetM]

You only have in-service if allowed by plan. What does it say? Any rollover to IRA is free from 10% penalty regardless of age of participant.

Sponsors normally don't like to allow leakage like this. This decreases assets and may cause fees to increase.

[GMK]

This sounds like diversification distributions, which may not be available in your plan. The Summary Plan Description will explain diversification distributions if they are available, and you can contact your plan administrator if you need additional information.

You will find that plans offer diversification distributions if the assets of the plan include the stock of the employer who sponsors the plan. Plan participants have the opportunity (under conditions defined in the plan) to take a distribution of some of the value of the company stock in their accounts, so they can invest it more diversely. If the distribution is a direct rollover to an IRA or other qualified plan, then no tax is due on the distribution at that time, and the early withdrawal penalty does not apply (as you describe).

[K-t-F]

"Diversification Distributioin"... that sounds like exactly what they want to do. The participants of this plan with large account balances want the ability to diversify their account but keep the plan itself very clean. The idea is to present to the large account participants an option to withdraw part of thier account balance (in the form of a distribution) and roll it into an IRA where the money can be invested outside the plan in assets with more risk. Of course it is not a viable option if the participant is hit with a 10% penalty.... but if rolling the $ into an IRA releives the participant of that penalty, then this will work.

I guess the question is, will the plan document allow this type of distribution or can it be written into the adoption agreement.

[Belgarath]

As to what the plan can allow or be amended to allow - what kind of a plan is it? If it is a profit sharing plan, then yes. If it is a pension plan, then no, unless they have reached normal retirement age. Subject, of course, to 401(k) restrictions if it is a 401(k).

[GMK]

If the plan does not already provide for diversification distributions, it must be amended before such distributions can be made. I cannot say whether your plan is eligible to offer diversification distributions. Your best bet is to contact a lawyer who understands these matters very well and have her/him write the amendment.

Generally, the purpose of diversifying is to reduce the risk associated with having a large fraction of one's retirement assets invested in one security, but diversification could also be used to increase risk if that is the goal.

The amendment will have to give all participants the opportunity to diversify, not just the large account holders.

[masteff]

PATA, be careful to not latch onto the concept too quickly... I'll reemphasize something GMK wrote above, as you haven't mentioned the plan in question having employer stock.

You will find that plans offer diversification distributions if the assets of the plan include the stock of the employer who sponsors the plan.

I'll stand by my previous post. We had two union plans that allowed w/drwl of employer contributions. We had multiple employees do exactly what you're asking about. To our annoyance, a financial planner near one of our sites even started coaching our employees on how to do it.

[K-t-F]

Not moving quickly at all...

Currently a PS plan. There is no employer stock in the plan... just some large account holders who are interested in riskier investments.

I appreciate anything and everything anybody has on these Diversification Distributions!!!

[Guest m.n.ouellette]

Not moving quickly at all...

Currently a PS plan. There is no employer stock in the plan... just some large account holders who are interested in riskier investments.

I appreciate anything and everything anybody has on these Diversification Distributions!!!

Hi. Just wanted to throw my two pennies in the pot... we add a Corporate Resolution to our files that say "any participant with at least $xx,xxx.xx balance has the option to segregate his/her account". We've seen lots of variations on this: must be 100% vested; different minimum balances, etc. Keep in mind that this minimum balance needs to be attainable by the average participant, and of course is available to every participant who reaches that balance. Usually we see the bar set at $10,000 or $5000. A part who defers $20 a week may never reach it, but Dr so-and-so will reach it very quickly. Rollovers are also taken into account.

This works VERY nicely. Most of our clients are Proffessional Service Corps, and most owners have those very large balances. They have a pooled account in place that is managed very prudently for the plan participants, but the doctor or attorney plan sponsor wants to take much larger risks.

Hope this helps... and anyone can feel free to quote better "legaleze". Good luck!

[Jim Chad]

Is this a benefit, right or feature which needs to be tested for coverage or nondiscrimination?