In-service withdrawal before 59.5

Hello, I have an executive who is being encouraged by his advisor to allow for in-service withdrawal before age 59.5 so that he can roll his balance into an IRA.  Is that allowable?  I believe if the plan were amended to allow such a thing, the IRS still regulates that a participant would only be able to withdrawal vested company contributed - pre-tax employee deferrals would have to remain in the plan.  Am I correct about that?  

Some monies could be made available prior to 59.5, others are restricted. Your understanding seem correct.

yes, you can have a general in-service withdrawal feature before age 59.5 for vested funds that are not 401(k), safe harbor, QNEC, etc. - but it doesn't mean you should.

1 hour ago, CaitlinMarg said:

…encouraged by his advisor...

Um, is there a potential incentive behind this "encouragement"?  As CuseFan implies, any similar plan provision might be in the best interest of the advisor, not necessarily in the best interest of the participant.

And a prohibited transaction lurks under certain circumstances, probably not present here.  While you are not the adviser to the individual, it is fair to advise that certain plan designs are not desirable for participants in general, or the plan.  The provision would add some burden to administration and create opportunities for error.

6 hours ago, CaitlinMarg said:

Hello, I have an executive who is being encouraged by his advisor to allow for in-service withdrawal before age 59.5 so that he can roll his balance into an IRA.  Is that allowable?  I believe if the plan were amended to allow such a thing, the IRS still regulates that a participant would only be able to withdrawal vested company contributed - pre-tax employee deferrals would have to remain in the plan.  Am I correct about that?  

Let's forget the specific question and discuss the objective.  First, is the "executive" the client (business owner) who can actually have  this change made to the plan document?  Let's assume that "executive" equals "business owner", because if it isn't, the employer should just tell the executive "no, the plan does not allow for that".  Sure sounds like the "advisor" is looking for commissions!

Why does rolling his funds into IRA seem like a good idea? What are we attempting to accomplish by such an action?  Is the plan participant directed or trustee directed?  Does he want to invest in things that are not allowed in the current plan document?  Probably more questions.

I have long argued that you DON'T answer client's questions; you ask them "why do you want to do that" and you will find out that the question is the WRONG question.  Here, you are trying to answer the question, but the real issue is not clear, so this might not be the right question.

Allowing for in-service distributions is much like offering a brokerage window with, arguably, less fiduciary exposure. I question the propriety of questioning the motives for the request,

unless it might open a discussion of issues related to the plan investment menu and/or participant transaction capabilities. I would not like to be the one to suggest to the owner or anyone

else that they are being bamboozled by their investment Svengali. On the other hand, account balances, particularly in smaller plans, may be critical to plan pricing. That is something the

employer may want to consider wearing her business hat (if the employer pays those expenses) or wearing her fiduciary hat if the expenses are borne in whole or part by participants.