I Want it Now! Receiving Pre-Termination of Employment 401(k) Plan Distributions

ERISA and tax-favored retirement plans are primarily intended to provide retirement income to plan participants and their beneficiaries. Unrestricted access to retirement savings before retirement generally is not permitted, but plans, particularly 401(k) plans, can and often do allow some in-service distributions. Take a look at the types of permissible in-service distributions by referencing this comprehensive chart. Consider adding PLESA emergency account provisions as a way to allow active participants under age 59 ½ some access to their savings without incurring the 10% penalty tax.

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• Qualified Retirement Plan Distribution Rules
  Learn more about the taxation and permissibility of in-service plan distributions. Sometimes they are eligible for rollover to another retirement plan or an IRA. Sometimes they are not. Importantly, taxable distributions before age 59 ½ often attract a 10% penalty tax under IRC § 72(t) (in addition to federal and applicable state income taxes).

• Plan Loan Rules for Qualified Retirement Plans
  See how savvy participants avoid distributions and taxation by taking a plan loan. The loan program and its administration must be designed and operated to avoid treatment of loans as an ERISA or IRC prohibited transaction. Plus, the program and loans must satisfy separate IRC rules for participants to avoid the loans being treated as taxable distributions. The good thing: interest payments by the participant increase the participant’s account balance. For reference, the current prime rate is 8.5%. Plans often reference that rate to arrive at the rate of interest that any plan loan should reflect.

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