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Posted

I can't seem to find an answer to this question. 

Is electing the source of an in-service distribution a protected benefit? Potentially an optional form of benefit? Or maybe not protected as an "administrative procedure for distributing benefits"? I'm not asking about removing in-service distributions entirely. This is a scenario were currently participants are able to elect which account (e.g. pre-tax, after-tax, rollovers) the distribution comes from. Would it be impermissible to eliminate this election and instead institute a policy whereby any in-service distribution is taken from all accounts on a pro-rata basis?  

Posted

The plan document should specify what sources are available for in-service distribution and when - for example rollovers may be withdrawn at any time but 401(k) only after age 59 1/2. So I think the individual source in-service distribution provisions are protected.

Contribution sources usually have different distribution restrictions/availabilities as well as tax implications when dealing with pre-tax, after-tax and Roth accounts, so regardless of the protection issue I think it would be inadvisable to enact any such pro-rata procedures.

That said, for sources with the same availability AND taxability, I think you can take in-service distributions pro-rata provided the document doesn't say otherwise.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

Posted

Building on CuseFan's response, to some extent the Internal Revenue Code dictates how the amount is taxed (or not). Although, if you request a withdrawal from after-tax contributions or Roth 401(k) contributions, and it is not a qualified Roth distribution, then a pro rata amount of taxable earnings and non-taxable contributions will be made. If you request a lump sum, however, the tax law completely dictates the tax treatment of such amounts with all employer contributions, pre-tax 401(k) contributions and earnings being fully taxable and Roth 401(k) contributions, after-tax contributions and earnings distributed in a qualified Roth distribution (generally after age 59 1/2) being tax free.

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