 NEWSLETTERS Volume 10, Issue 1 .................... June 2010 Are Active Participants asking for Distributions? Some plan administrators may currently be experiencing a greater number of participants asking for money from the retirement plan. While addressing these questions, you can rest assure that the rules regarding distributions from qualified retirement plans have not changed. The 3-page Plan Highlights for your plan includes descriptions of the 3 possible distribution options for an actively employed participant: in-service withdrawal, loan and hardship withdrawal. These are summarized below to refresh you on what’s available. Then you can review your plan’s Plan Highlights or Summary Plan Description to confirm what your plan offers. In-Service Withdrawals Distributions allowed due to a participant reaching a certain age that is close to retirement age. The earliest age for in-service withdrawals is usually 59.5 as 401(k) monies may not be distributed prior this age by an actively employed participant. The other common age for this type of distribution is age 65. When allowed, in-service withdrawals may be allowed from all money types, or may be limited to certain money types. Tax withholding does apply to these distributions. Reference your plan’s documents to determine if your plan allows in-service withdrawals, what age they are allowed, and what money types they are allowed from. Loans Loans allow participants to borrow money from themselves from their retirement account in the retirement plan. Because this is not a distribution, but a borrowing of money, taxation does not apply. Loans are required to be paid back according to the amortization schedule on a regular, consistent basis. If loan payments are not made during a calendar quarter, a loan will fall out of good standing. When this happens the outstanding amount of the loan is deemed to be taxable like a distribution would be taxable. The early withdrawal penalty would also then apply if the participant is under age 59.5. The minimum loan is $1,000 and the maximum loan is 50% of the participant’s vested account balance, or $50,000, whichever is less. Reference your plan’s documents to determine if your plan allows loans, and the terms of the loans if allowed. Hardship Withdrawals When an employee has exhausted the in-service distribution and loan options available to him and he is faced with an immediate, sudden financial burden, he may be able to receive money from the retirement plan as a hardship withdrawal to help with this need. To be very clear, the employee is REQUIRED to take all in-service withdrawals and loans available before he is allowed to take a hardship withdrawal. All plans on the ARS prototype document limit hardship withdrawals to the six safe harbor reasons: medical expenses, college tuition or room and board, purchase of a primary residence, payments to avoid foreclosure or eviction from principal residence, burial or funeral expenses, and payments to repair damage to a principal residence that would qualify as a casualty loss on tax return. If an employee does not satisfy one of the six safe harbor reasons, then a hardship withdrawal would not be available to him. Other important details about hardship withdrawals: they are most commonly available from 401(k) contributions only, they are taxable but withholding is optional, the 10% early distribution penalty would apply if the employee were under age 59.5, future 401(k) contributions must be stopped for 6 months following a hardship withdrawal, the amount available is only an amount necessary to address the immediate financial need. Reference your plan’s documents to determine if your plan allows hardship withdrawals. If you have questions about distributions for actively employed participants, call Administrative Retirement Services, Inc. ©
Administrative Retirement Services, Inc. 2010
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