Distribution of Rollover from PS Plan

[CAR]

A client with a Sungard Prototype Profit Sharing Plan wishes to allow a participant (age 52) to receive a partial distribution from the plan. The participant has a rollover account in the plan that was an unrelated rollover into the plan several years ago. According to what I read in the plan document and in the ERISA book a participant can receive distribution of his/her rollover account in a PS plan at any time regardless of age or service. I have not read anything to the contrary in the plan document. This partial distribution would be a direct rollover into an IRA so that he can invest in a partnership holding real property. The plan does not allow this type of investment and the employer wants to keep it that way. The participant is under the plan's early retirement age of 55 but has over 10 years of service and is one of the company owners and is an HCE. The company also has a 401k plan but the participant does not have a rollover in that plan. Is this rollover direct to an IRA possible? If so, does the plan that currently only allows lump sum distributions need to be amended to allow partial withdrawals? Are there any other issues to consider?

[Guest Sieve]

There is a question on the Adoption Agreement that can be answered to allow rollovers into the plan to be distributed at any time. Just amend the plan to change the answer to that question.

[CAR]

There is a question on the Adoption Agreement that can be answered to allow rollovers into the plan to be distributed at any time. Just amend the plan to change the answer to that question.

The plan sponsor does not want to allow all participants who have rollovers inside the plan to have access to them at any time which is the only rollover distribution option available with this plan. According to what I read in the document, the participant can take an in-service distribution if he/she is age 55 OR has 10 years of service. However, there is no where on the In-Service distribution form to specify that this is to be a direct rollover to an IRA. The Plan and hence the Distribution Election form only allows lump sum distributions. Do they need to amend the plan to allow for partial withdrawals since there is an In-Service distribution option? Also I would like to confirm that the participant who is under age 59 1/2 but has 10 years of service can take an in-service distribution as a direct rollover to an IRA (NOT a Roth) and avoid the 10% early distribution penalty. Sorry for all the confusion but I am confused and concerned because the amount to be distributed is a lot of money and I do not want to make a mistake on this. Thanks.

[Guest Sieve]

If participant is age 59-1/2, there's no excise tax on distribution, whether in-service or not.

To be safe, amending to allow partial distributions would be a smart thing to do except that it opens others up to the same treatment. In any event, why wouldn't the in-service distribution form permit direct rollovers?--IRC Section 401(a)(31)(A) requires it, whether a single lump-sum or less.

[CAR]

If participant is age 59-1/2, there's no excise tax on distribution, whether in-service or not.

To be safe, amending to allow partial distributions would be a smart thing to do except that it opens others up to the same treatment. In any event, why wouldn't the in-service distribution form permit direct rollovers?--IRC Section 401(a)(31)(A) requires it, whether a single lump-sum or less.

The participant is only 52 but the partial distribution will be a direct rollover so I am assuming that there will be no 10% excise tax. I would like confirmation from someone more experienced than me that this in-service distribution as a direct rollover by a participant who is under 59 1/2 will not have the 10% early distribution penalty.

Also I am checking with SunGard now to see if they have a more updated in-service distribution form that has a direct rollover option.

[Guest Sieve]

No excise tax on direct rollovers, whether or not an in-service distribution. The early distribution excise tax is a tax on the amount included in income, and with a direct rollover there is no taxable income. (" . . . tax . . . for the taxable year . . . shall be increased by . . . 10 percent of the portion of such amount [received] which is includible in gross income." IRC Section 72(t)(1).)