Pre 59 1/2 in-service withdrawals from profit sharing plan

[Guest JER57]

Looking for guidance on pre 59 1/2 in service withdrawals from a profit sharing plan. The plan document gives the option to allow the withdrawals with limitations to money that has been "seasoned" (2 years), to indicate an "attained" age, plan participation for 5 years. My question is around the "attained age" option. Traditionally, I've seen this indicated at age 59 1/2, however is there any restriction on the "attained age" used in the document. For example, could it be possible to use age 21 which would effectively allow any participant to take pre 59 1/2 withdrawals (understanding this could cause other plan issues). Any input and references would be appreciated

[ETA Consulting LLC]

That's the interesting thing (as you have pointed out), there is no stated requirement on what the attained age must be. I would not be the one to push the envelope to age 21. I have, however, drafted plans using age 45 for the non deferral or safe harbor amounts.

This is a topic potentially subject to endless debate.

Good Luck

[Tom Poje]

in fairness to the participant, age 59 1/2 is chosen to avoid the 10% early withdrawal penalty

[401king]

Our document system (DATAIR) restricts in-service withdrawals for Deferrals, QNEC, QMAC and SH contributions, requiring that the employee be at least age 59 1/2 for an in-service withdrawal. Is that not a mandatory requirement for those sources? I've been under the assumption that only the discretionary sources & rollovers are eligible at any age.

[BG5150]

You are correct.

[masteff]

1) the 2 year minimum threshhold comes from Rev Rul 71-295 http://www.charitableplanning.com/document/666344 (ran across it last week answering another question) Not sure where the 5 years of participation service originates but I know of a plan that has a similar 2 years seasoned / 5 years participation service combination.

2) Rev Rul 1980-276 says in part: "The attainment of a stated age in a profit-sharing plan is merely one of several events that may be designated as fixing the time for making distributions from the plan. In view of the definition of normal retirement age found in section 411(a)(8) of the Code, and in the absence of any statutory prohibition or limitation, a profit-sharing plan may specify any age for distribution of benefits and, also, any age for normal retirement if it is less than the later of age 65 or the completion of 10 years of participation."

So you could have any age.

Note that 1.401(b)(1)(ii) uses the word "or". So in my opinion, you could eliminate the attained age requirement entirely. The plan I mentioned above did not have an age requirement, just the 2 years seasoned /5 years participation service part of it. But [disclaimer] consult an ERISA atty who can review the actual language of your plan.

Edit:

found it! the 5 year participation rule comes from Rev Rul 1968-24 http://www.charitableplanning.com/document/676509

[ETA Consulting LLC]

Poje: Nothing to preclude a rollover when an age prior to 59 1/2 is used. That may be a consideration in order to allow individuals to diversify investments outside of the qualified plan. But, you make a good point

Masteff: If I ever need a regulatory cite, I'm contacting you first

Good Luck!

[Tom Poje]

ERISAtoolkit: I wasn't even thinking about that possibility. that sounds so artificial. I can't let an HCE have his own outside directed investments within the plan unless it is available to everyone, but can get around that rule with in-service withdrawal.

Masteff: I looked it up from am ASPPA talk I gave a few years ago on distributions. Makes me feel good, because those were the same cites I had listed, so at least someone else has the same info I had! Completely forgot about that talk.

[Kevin C]

Another issue that goes with setting in-service eligiblity is vesting. When a partially vested participant receives a distribution, the plan document will tell you what formula is used to determine the remaining vested balance in future years. It's loads of fun when that formula gives you a negative vested balance. Yes, I've had that happen. Our document has a provision that allows you to restrict in-service distributions to accounts that are fully vested. I use that now when I do an amendment to add in-service distributions. If that isn't available, a participation requirement can be used to make sure most are 100% vested by the time they are eligible for an in-service.