401k In-service withdrawals

[litovskyassetmanagement]

Molar Mechanic wrote:

I’m a bit confused dealing with our pension folks.  We’re discussing the options for investments in our 401k plans, and if I’m not satisfied with the options or fees as we can amend them within the plan, I may take the money out to an IRA and on to a solo 401k.

Yesterday, that seemed to be an option, but today I was told that:

The 401(k) Profit Sharing Plan does not allow for in-service distributions prior to the attainment of age 59 ½. If the money is moved to an IRA without a distributable event, it will be a prohibited transaction, which is reportable to the IRS and excise taxes must be paid until corrected. It can also cause the plan to be disqualified. A distributable event is any one of the following:

              Termination of employment

              Retirement

              Disability

              Attainment of age 59 ½

The plan document states

Withdrawal restrictions. Generally, you may withdraw amounts held on your behalf under the Plan upon death, disability or
termination of employment. In addition, the following withdrawal options apply while you are still employed.
 Salary Deferrals. You may withdraw amounts attributable to Salary Deferrals from the Plan while you are still
employed under the following circumstances:
 You have reached age 591⁄2.
 You suffer a hardship (as defined in the Plan). See the Summary Plan Description for a list of permissible
hardship events.
 You are in certain qualified active military duty. Please contact your Plan Administrator if you have any questions
regarding the availability of a distribution under this provision.
 Safe harbor contributions. Safe harbor contributions are generally eligible for distribution at the same time as Salary
Deferrals. However, you may not take a withdrawal of your safe harbor contributions on account of a hardship or on
account of qualified military service.
 Rollover contributions. You may withdraw any rollover contributions you make to the Plan at any time.
 Other contributions. As described above, the Plan also provides for employer contributions and matching
contributions. You may withdraw amounts attributable to such contributions while you are still employed if:
 You have attained age 591⁄2.
Special distribution rules. In applying the withdrawal provisions under the Plan, the following special rules apply:
 In service distributions are only permitted if you are 100% vested in the amounts being withdrawn
 You may take no more than 1 in-service distribution(s) during the plan year
 You may not take an in-service distribution of less than $1,000

I’m a partner, not close to 59.5, and have the ability to modify the plan within the law.  Is there a reason I should be limited under the current plan or a modified one from in-service withdrawals?

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If you are a partner in a practice, why would you take the money out of a plan with high fees and bad investment options when instead you can simply modify the plan to better accommodate your needs?  This will benefit all participants, not only you, so I don't see how this could be a difficult thing to do.  I often see senior partners' personal advisers running the practice plans, which is a breach of fiduciary duty for the plan sponsor.  Other than that, there shouldn't be any attachment on behalf of partners to a high cost provider, so there is no reason why you can't replace your plan adviser with an ERISA 3(38) fiduciary who should be able to build you a low cost fund menu and model portfolios, as well as help eliminate all asset-based fees by recommending a TPA and/or record-keeper that do not charge any asset based fees at all.  This is not that difficult to do, and should save you and others a lot of money over time.  One issue is that some providers are a bundle, so you can't leave one without leaving all, but so be it, good thing there are plenty of low cost options available for plans without much assets at all (as well as for plans with lots of assets).  There is no reason to pay any more than about 0.15% for your investment options. Every basis point counts over the long term - get rid of all AUM fees and high expense funds, and everyone will benefit.

[Molar Mechanic]

Thanks, Great info here when things get confusing!

[spiritrider]

1. Correct. Unless it is for a hardship withdrawal, separation, disability or death.

A 401k document provider would not allow an amendment contrary to IRS regulations anyway.

2. Correct. Provided they are 100% vested.

3. Correct. If the plan documents allow. Which yours appears to.

[Molar Mechanic]

Help me clarify.

1.  Money I put in as an employee deferral cannot be touched until 59.5, no matter what the documents say.

2.  Employer share can be withdrawn if plan documents allow.

3.  Money rolled into the plan can be rolled right back out at any point.

 

Is that correct?

[spiritrider]

It sounds like your 401k plan has an age 59 1/2 requirement for all non-hardship in-service withdrawals/rollovers except for rollover contributions. This is a pretty standard default for most 401k plans.

The sponsor of the plan can somewhat modify the in-service withdrawal/rollover rules of the plan. I wouldn't say that you Individually as a partner has the ability to modify the plan. The partners collectively have the ability under the terms of the partnership agreement to modify the plan.

Just be aware that even if you can convince the operative numbers of partners to agree to modify the plan. IRS regulations prohibit the in-service withdrawal/rollover of employee deferrals prior to age 59 1/2.

[Molar Mechanic]

I'm a bit confused dealing with our pension folks.  We're discussing the options for investments in our 401k plans, and if I'm not satisfied with the options or fees as we can amend them within the plan, I may take the money out to an IRA and on to a solo 401k.

Yesterday, that seemed to be an option, but today I was told that:

The 401(k) Profit Sharing Plan does not allow for in-service distributions prior to the attainment of age 59 ½. If the money is moved to an IRA without a distributable event, it will be a prohibited transaction, which is reportable to the IRS and excise taxes must be paid until corrected. It can also cause the plan to be disqualified. A distributable event is any one of the following:

              Termination of employment

              Retirement

              Disability

              Attainment of age 59 ½

The plan document states

Withdrawal restrictions. Generally, you may withdraw amounts held on your behalf under the Plan upon death, disability or
termination of employment. In addition, the following withdrawal options apply while you are still employed.
 Salary Deferrals. You may withdraw amounts attributable to Salary Deferrals from the Plan while you are still
employed under the following circumstances:
 You have reached age 591⁄2.
 You suffer a hardship (as defined in the Plan). See the Summary Plan Description for a list of permissible
hardship events.
 You are in certain qualified active military duty. Please contact your Plan Administrator if you have any questions
regarding the availability of a distribution under this provision.
 Safe harbor contributions. Safe harbor contributions are generally eligible for distribution at the same time as Salary
Deferrals. However, you may not take a withdrawal of your safe harbor contributions on account of a hardship or on
account of qualified military service.
 Rollover contributions. You may withdraw any rollover contributions you make to the Plan at any time.
 Other contributions. As described above, the Plan also provides for employer contributions and matching
contributions. You may withdraw amounts attributable to such contributions while you are still employed if:
 You have attained age 591⁄2.
Special distribution rules. In applying the withdrawal provisions under the Plan, the following special rules apply:
 In service distributions are only permitted if you are 100% vested in the amounts being withdrawn
 You may take no more than 1 in-service distribution(s) during the plan year
 You may not take an in-service distribution of less than $1,000

I'm a partner, not close to 59.5, and have the ability to modify the plan within the law.  Is there a reason I should be limited under the current plan or a modified one from in-service withdrawals?