In-Service Distributions at Any Age?

[Guest Thornton]

The broker for a plan we administer called today and asked me to amend the plan to permit in-service distributions at any time, any age, including 401(k) deferrals. I explained the 5 year/2 years allocated rule for profit sharing contributions, and advised him that deferrals cannot be distributed until age 59 1/2 (except for hardship, etc.). He said he has another client with a plan that permits immediate in-service at any age for any money type if the money is rolled to an IRA.

Am I missing a new trend or something? I'm not aware af any law change permitting in-service of deferrals prior to age 59 1/2, at least not in a prototype or volume submitter. Also, would the distribution be eligible for rollover to an IRA?

[QDROphile]

When brokers call, the answer is negative. That is a top ten rule.

[masteff]

Am I missing a new trend or something?

It's not a new in and of itself. Though I suppose it's possible that some training course has recently started pitching this to a wider number of brokers as a way to gain new business. We had an acquired plan at one location where some employee and/or broker figured this out (w/ respect to company money, that is) and it spread to a larger number of employees than we would have liked. Of course that was back in the tech bubble, so no idea how well/badly any of them did. Remember that the broker is solely motivated by the fees he hopes to earn. This is often at odds w/ your company's goal of helping workers build secure retirement savings.

[david rigby]

Why would anyone take direction w/r/t plan design from the broker?

[WDIK]

Not to bash all brokers, but our office recently was berated and verbally abused by a broker over the issue of a one-year break-in-service requirement prior to distribution. He wanted the rollover done immediately (for obvious reasons), had been in the pension business for over 15 years and had never heard of such a ludicrous and obviously illegal provision.

[Kimberly S]

Why would anyone take direction w/r/t plan design from the broker?

It may not be the preferred method for plan design, but if the primary sales force for your new plans is brokers, you sure don't want to exclude them from the process.

[John Feldt ERPA CPC QPA]

We will only take directions to draft a plan amendment with at least a verbal consent of the client, excluding the IRS required amendments of course.

An even more ludicrous plan provision would be to not allow any participant distributions until normal retirement age (client wanted this in their plan to prevent any employee from taking their lump sum to set up a competing business).

[401_4_ever]

Nothing about that seems either ludicrous or illegal. A plan is not required to allow a distribution at termination of employment. The only requirements are to permit them at either death, or attainment of normal retirement age combined with termination.

I once had a plan that wrote into the document (it was an IDP), that if the participant signed a non-compete clause at the time of termination, they could take a lump sum form of distribution. If they didn't sign a non-compete clause at termination they had to take payment via installments, and lump sum payments would not be available until ten years after termination. They requested a determination letter from the IRS. This provision was approved.

We will only take directions to draft a plan amendment with at least a verbal consent of the client, excluding the IRS required amendments of course.

An even more ludicrous plan provision would be to not allow any participant distributions until normal retirement age (client wanted this in their plan to prevent any employee from taking their lump sum to set up a competing business).

[John Feldt ERPA CPC QPA]

I know, I was failing to make the comment appear tongue-in-cheek, using WDIK's broker's use of the word ludicrous. I like the non-compete provision idea, that's good.

edited to add: Lest there be any confusion to any reader here, the broker in WDIK's message was obviously incorrect about such a provision being illegal.

[GMK]

401_4 wasn't the only one to come up a little short on that 'ludicrous' comment. We get into our serious reading mode and start to take it all in. Maybe add a ha-ha or smile face, because we enjoy the added humor (once we get the joke).

From summaries I've read lately about a few non-compete challenges, linking plan payment options to non-compete agreements might be disallowed in some places, if challenged. I'm no expert on this. Just suggesting that it may not be automatically OK (from the non-compete side).

[Below Ground]

I waste an incredible amount of time explaining why and when distributions can be made. I must admit that I am sick of hearing how "Aunt Betty got her 401(k) check on the day she quit", or how "Cousin Billy (at age 24) took his full 401(k) Account (including deferrals) while still working to invest in a sewage reprocessing factory", or "it's my money, you can't tell me what to do". Liars, drunks, morons and self-impressed "people" are in the mix. (I have been threatened numerous times.) I would love a nice simple solution, but there does not seem to be one. Education is the answer? Don't you communicate with these folks? Right. People hear what they want to hear, and nobody ever reads.

[Bird]

Nothing like a good rant now and then, is there?! Thanks Below Ground, I enjoyed that and couldn't have said it better myself.

[JanetM]

Below ground you speak for us all. We can talk until we are blue in the face - but they don't listen.

[John Feldt ERPA CPC QPA]

I'll have to fix my audio, I can't hear anything.

[Below Ground]

Misery loves company. Thanks. I must admit I do feel better.