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in service distribution made but not allowed to participant/fiduciary


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A 401k participant, who happens to also be a fiduciary, requested an in-service distribution after he turned 59 1/2. The plan administrator allowed the distribution, which the participant then rolled over to an IRA. The terms of the plan only allow in-service distributions upon turning 62 years of age.

Transaction occurred in 2014 and discovered in 2015. Amount was approximately $500,000, which represents about 25% of plan assets.

The operational failure seems easy enough to correct, but is this not also a prohibited transaction? Any suggestions for addressing the prohibited transaction? Apply for individual exemption? Would a retroactive plan amendment allowing the distribution be feasible? If the distribution was allowed under the terms of the plan, a statutory exemption appears to apply.

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Are in-service distributions after 59 1/2 something that CAN be amended into a plan? Is the ability to permit in-service distributions only after 62 something PPA added for only DB plans (except those able to justify an earlier normal retirement age) or all plans in general?

Always check with your actuary first!

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