In-Service Distribution

[Randy Watson]

Is an in-service distribution of employer contributions subject to a 10% penalty if it's before 59-1/2?

[masteff]

I see nothing in IRS Pubs 571 and 575, nor IRS Form 5329, that gives it an exception to the penalty.

[J Simmons]

Is it a hardship distribution? Has the EE been called to active duty? Is the EE disabled?

If not, how do you get around IRC § 403(b)(11) for an in-service distribution before age 59 1/2 years?

If the EE has been called to active duty or is disabled under circumstances allowing an in-service, pre-age 59 1/2 years distribution, then the 10% penalty does not apply. IRC §§ 72(t)(2)(G) or 72(t)(2)(A)(iii).

If the hardship withdrawal is for medical expenses, then look at IRC § 72(t)(2)(B) for exception to 10% early penalty.

[Randy Watson]

Is it a hardship distribution? Has the EE been called to active duty? Is the EE disabled?

If not, how do you get around IRC § 403(b)(11) for an in-service distribution before age 59 1/2 years?

If the EE has been called to active duty or is disabled under circumstances allowing an in-service, pre-age 59 1/2 years distribution, then the 10% penalty does not apply. IRC §§ 72(t)(2)(G) or 72(t)(2)(A)(iii).

If the hardship withdrawal is for medical expenses, then look at IRC § 72(t)(2)(B) for exception to 10% early penalty.

Not a hardship, disability or active duty. See Reg. Sec. 1.403(b)-6(b).

[J Simmons]

Not a hardship, disability or active duty. See Reg. Sec. 1.403(b)-6(b).

Ahh, you did say employer contributions.

[Lori H]

if a participant owns the contract, what's the difference in taking the money prior to termination and after termination?

[mbozek]

I see nothing in IRS Pubs 571 and 575, nor IRS Form 5329, that gives it an exception to the penalty.

There are legislative exceptions for inservice from annuity contracts attributable to employer contributions as well as all contributions prior to 1987. Prior to 1987 there were no restrictions on inservice distributions from a 403b annuity contract. There is also a grandfather provison that exempts the accumulation value prior to 1/1/87 from the MRD rules. The exemptions for pre 87 annuity benefits are in the effective date provisions for the 403b annuity changes in the 1986 tax reform act, PL 99-514 sections 1122(d)(2), 1123©(1) and ©(2). You need to look at the effective date provisions to see if there is an exemption from the penalty tax.

[J Simmons]

if a participant owns the contract, what's the difference in taking the money prior to termination and after termination?

If the 403b contract is one that depends on an employer's plan for its tax exemption (per the 2007 final 403b regs, depends on the contribution history), then the plan limits in-service, pre-age 59 1/2 distributions in accordance with the final 403b regs.

[Lori H]

if a participant owns the contract, what's the difference in taking the money prior to termination and after termination?

If the 403b contract is one that depends on an employer's plan for its tax exemption (per the 2007 final 403b regs, depends on the contribution history), then the plan limits in-service, pre-age 59 1/2 distributions in accordance with the final 403b regs.

So in the past, a participant could receive an in service distribution at any time irregardless of hardship, age, etc. The contract was theirs. They could dist the money while still employed. Now, they have to have provisions in the plan due to final 403(b) regs that state when a participant can have their funds, i.e. hardship, loan, early retirement, etc. A participant could not just take a distr. whenever they feel like it as in the past?