Very Basic Question

[PJ2009]

I know that plain vanilla profit sharing plans can permit in-service withdrawals. Can they also permit loans and hardships? this question has never arisen before. I know money purchase plans cannot, but a profit sharing plan could provide for all three, could it not?

[J Simmons]

yes.

[PensionPro]

Are the in-service and hardship withdrawals subject to the 2 year seasoning/5 year participation rule?

[PJ2009]

Are the in-service and hardship withdrawals subject to the 2 year seasoning/5 year participation rule?

Yes, they would be subject to the 2/5 rule, just as profit sharing money is subject to the rules when part of a 401(k) arrangement.

[MWeddell]

I disagree with the above post.

The rules for loans are the same for profit-sharing only plans as they are for any other qualified defined contribution plan. The IRS regulations under Code Section 72(p) and the DOL prohibited transaction regulations apply to profit-sharing only plans the same way that they apply to any other DC plan.

For hardship withdrawals, profit-sharing contributions can be withdrawn once the participant has experienced a hardship event, as defined in the plan document. One does not also have to satisfy the 2 year wait or 5 years of plan participation requirement. See Treas. Reg. 1.401-1(b)(ii), which permits distribution "upon the prior occurrence of some event such as layoff, illness, disability, retirement, death, or severance of employment," and Rev. Ruling 71-224, which interprets financial hardship as being such an event. Most plan documents will define "hardship" similar to how the 401(k) regulations permit one to define the term, but it doesn't have to be defined in that way.

Of course, now that you have a vote on each side of the issue, you should probably wait for more opinions from other posters.

[J Simmons]

Cast my vote with MWeddell.

[Guest Sieve]

Mine, too.

[Below Ground]

Ditto. Nothing like piling on?

[PJ2009]

Ditto. Nothing like piling on?

A capsule summary of your helpful comments:

1. A profit sharing only plan can offer loans, hardships, and regular in-service withdrawals.

2. The loans and hardships are NOT subject to the aging rules (2year/5 year).

3. Regular in-service withdrawals ARE subject to the aging rules.

Thanks and any more comments more than welcome!

[Guest Sieve]

PJ --

Your #3 is slightly off. The reg. cited earlier (Treas. Reg. Section 1.401-1(b)(1)(ii)) also allows distributions from a PSP upon "the attainment of a stated age". So, you could permit distribution at, say, age 55, or 59-1/2, or whatever, without utilizing the 2/5 rule (which is the practical application of the "after a fixed number of years" distribution standard of that reg.).

[PJ2009]

PJ --

Your #3 is slightly off. The reg. cited earlier (Treas. Reg. Section 1.401-1(b)(1)(ii)) also allows distributions from a PSP upon "the attainment of a stated age". So, you could permit distribution at, say, age 55, or 59-1/2, or whatever, without utilizing the 2/5 rule (which is the practical application of the "after a fixed number of years" distribution standard of that reg.).

Great catch....thanks and have a great weekend!

pj