Ineligible In-Service Withdrawal

[emmetttrudy]

The Plan allows an in-service withdrawal to Participant A for $50,000. Participant A is only 40 years old and the Plan only allows in-service withdrawals at age 59 1/2. First question - is this a prohibited transaction? Second question - assuming it is, Form 5330 must be completed and filed, correct?

[Guest Sieve]

I think this is simply payment of a benefit to a plan participant--albeit one not allowed by law or by the plan--and not a PT. First thing you need to do is try to get the $$ back from the participant, and, if that fails, then you need to correct the early distribution under VCP, since the payment is a disqualifying operational defect.

[jlea]

Yes, I'd begin by correcting in accordance with EPCRS. Hopefully you'll be able to correct under SCP and avoid the VCP fee.

As for the PT issue, I have had informal discussions with a DOL agent who, while noting that it might technically qualify as a PT, agreed that correction in accordance with EPCRS returns the qualified plan to the position it would have been in had the error not occurred. She stated then that it would be a nonissue for the DOL.

[QDROphile]

Could be a PT if Participant A is a fiduciary and used that status to effect the distribution.

[emmetttrudy]

Could be a PT if Participant A is a fiduciary and used that status to effect the distribution.

The participant isn't a fiduciary or owner. Based on my interpretation of the definition of "disqualified person" on the IRS website this person does not fit into any category, and thus my conclusion that it isn't a PT. But it sure smells like one, which is why I question if I'm interpreting the definition wrong.

[Guest Sieve]

Remember, though: this participant is a party in interest under ERISA as an employee of the employer sponsoring the plan (even though not a disqualified person under the Code), so the PT potential remains.

Generally, though, if the individual is not a fiduciary, this would not be treated as a PT because the $$ paid represent a benefit under the plan.

[jlea]

Yes, important distinction and one I didn't amplify. My discussion with the DOL agent was in context of rank and file NHCE and, again, was corrected in accordance with EPCRS.