Multiple In-Service Distributions In 1 Plan Year

[metsfan026]

We have a plan that allows for in-service distributions.  A participant who is over 59.5, but under the age for an RMD, has already taken 3 smaller in-service distributions this year and is now inquiring about another.  I've always been told that the Plan can't be used like a bank account, and these consistent in-service distributions could cause an issue.

So, that leads to two questions:

1) How many in-service distributions are viewed as excessive and, if audited, could cause an issue?
2) What would the ramifications be if it was viewed as excessive?

Thanks in advance everyone!

[Bill Presson]

1. Does the plan limit the number of in-service distributions? If not, why would it be excessive?

2. Does the participant pay a distribution fee each time? If so, might want to have a discussion with them to understand the consequences. 

[metsfan026]

1 minute ago, Bill Presson said:

1. Does the plan limit the number of in-service distributions? If not, why would it be excessive?

2. Does the participant pay a distribution fee each time? If so, might want to have a discussion with them to understand the consequences. 

There's no limit, though we are discussing it.  I've always been told that the Plan can't be viewed like a bank account, and excessive in-service distributions could cause an issue.

[Paul I]

@metsfan026 you (facetiously) must really be looking forward to dealing with PLESAs (Pension Linked Emergency Savings Accounts).  Four features in particular will make administering PLESAs a lot of fun:

• They are Roth accounts.
• Participants can withdraw funds at their discretion.
• The first 4 withdrawals cannot be subject to fees or charges.
• Participants can replenish the account after taking the withdrawals.

This almost makes the plan you are working with seem reasonable.

[metsfan026]

46 minutes ago, Paul I said:

@metsfan026 you (facetiously) must really be looking forward to dealing with PLESAs (Pension Linked Emergency Savings Accounts).  Four features in particular will make administering PLESAs a lot of fun:

• They are Roth accounts.
• Participants can withdraw funds at their discretion.
• The first 4 withdrawals cannot be subject to fees or charges.
• Participants can replenish the account after taking the withdrawals.

This almost makes the plan you are working with seem reasonable.

It doesn't bother me, I'm going off what an ERISA attorney had told me.  That's why I'm asking the question!

[CuseFan]

If there is no plan restriction there is no statutory issue either, assuming all the proper tax reporting/withholding is happening. A pension plan can commence in-service monthly payments as early as age 59 1/2, so what's the big deal here? Just because something creates an administrative headache and isn't the most efficient utilization of one's account doesn't mean there is a statutory issue. 

[ratherbereading]

If the plan doesn't limit them then I don't see an issue.  They are entitled to take as many withdrawals as they want if the plan doc allows it. Why would you want to limit that? 

[QDROphile]

I can understand why an employer would like to limit withdrawals, especially in-service withdrawals, but if the plan is designed to allow the plan to be used as a bank, let it go. There are no regulatory concerns if withdrawals are in accordance with law (e.g. after age 59.5) and plan terms. I am a bit queasy about individual counseling concerning the wisdom of in-service withdrawals, but have no problem with a general statement that includes information that discourages withdrawals by pointing out the immediate and long term negative consequences.

[Bri]

If only withdrawal fees worked like PT excise taxes.....

[jsample]

On 7/30/2024 at 1:35 PM, Paul I said:

@metsfan026 you (facetiously) must really be looking forward to dealing with PLESAs (Pension Linked Emergency Savings Accounts).  Four features in particular will make administering PLESAs a lot of fun:

• They are Roth accounts.
• Participants can withdraw funds at their discretion.
• The first 4 withdrawals cannot be subject to fees or charges.
• Participants can replenish the account after taking the withdrawals.

This almost makes the plan you are working with seem reasonable.

The distributions can be subject to fees or charges, just not to the employee who is taking the distribution.  You can certianly charge the employer.

[Paul I]

@jsample technically you are correct that a fee can be charged to the employer.  Practically, with our clients, if we told our clients we would charge our standard distribution fees for per payment because a participant took 4 very small payments for an undocumented "emergency", they would not agree to pay it and would think we were crazy for suggesting it.

[Peter Gulia]

Imagine an individual-account (defined-contribution) plan for which the employer never pays any plan-administration expense; all is borne by individuals’ accounts.

Imagine the plan includes an arrangement for pension-linked emergency savings accounts.

Assume the ERISA § 801(c) conditions for a PLESA make it more expensive to administer those accounts than the non-PLESA accounts.

While honoring the constraint against a charge for a PLESA account’s distributions, may the plan’s fiduciary set different plan-administration expense allocations between the PLESA and non-PLESA accounts?

[Bill Presson]

3 hours ago, Peter Gulia said:

Imagine an individual-account (defined-contribution) plan for which the employer never pays any plan-administration expense; all is borne by individuals’ accounts.

Imagine the plan includes an arrangement for pension-linked emergency savings accounts.

Assume the ERISA § 801(c) conditions for a PLESA make it more expensive to administer those accounts than the non-PLESA accounts.

While honoring the constraint against a charge for a PLESA account’s distributions, may the plan’s fiduciary set different plan-administration expense allocations between the PLESA and non-PLESA accounts?

As if I needed more of a reason to never, ever let a client add these monstrosities to a plan.

[RatherBeGolfing]

20 hours ago, Bill Presson said:

As if I needed more of a reason to never, ever let a client add these monstrosities to a plan.

Amen @Bill Presson!

[Peter Gulia]

I know those who do the TPA, recordkeeping, or operations work abhor the PLESAs.

But my note above isn’t an idle hypothetical; its question is a live one from a real employer (not my client, but my client’s client). Although my client tried to talk the employer out of providing PLESAs, the employer persists in seeking to provide it (and has its own business reasons for desiring to do so).

Is it proper to charge the PLESA accounts a bigger share of plan-administration expenses than is charged against non-PLESA accounts?