For most retirement plans, a participant becomes entitled to take a distribution of his or her plan benefit on termination of employment. In daily valued 401(k) plans, that can happen immediately; whereas, other types of plans might make a former employee wait until the end of the year in which they terminate to receive a distribution.
Plans also have the ability to allow participants to receive a distribution of some or all of their account balance while still employed. The plan document must reflect these in-service distribution provisions. This FAQ discusses several of the options that are available.
Other than terminating employment, how can participants get access to their retirement accounts?
As long as the plan document includes the applicable provisions, participants who are still employed can access their accounts in three general ways:
- Loans,
- Hardship withdrawals, and
- In-service distributions.
Since we have other pages on the site devoted to loans and hardship distributions, the remainder of this FAQ will cover in-service distributions.
What is an in-service distribution?
Quite simply, it is a distribution that a participant takes from a retirement plan while still employed.
Are there any restrictions as to when a participant can take an in-service distribution?
Yes, there are, and the restrictions vary based on the account source, e.g. employee deferrals, profit sharing, etc. Those restrictions are generally based on factors such as age and service.
What is the significance of age 59 ½ when it comes to in-service distributions?
That is the earliest age the law allows a participant to take an in-service distribution from his or her 401(k) deferral account and, if applicable, accounts holding Qualified Nonelective Contributions (QNECs – includes safe harbor nonelective contributions) and Qualified Matching Contributions (QMACs – includes safe harbor matching contributions).
Age 59 ½ is also the age at which the 10% early withdrawal penalty no longer applies.
Does that mean that other types of plan accounts are available at a younger age?
Yes. Accounts holding other types of contributions such as non-safe-harbor matching and profit sharing contributions can be made available for in-service distribution at any age. Keep in mind that the 10% early withdrawal penalty does apply in that case.
Our experience is that it is extremely uncommon for plans to include earlier availability for in-service distributions. Most still go with age 59 ½ across the board.
What about amounts that a participant rolls over into the plan from an IRA or prior employer’s retirement plan?
Plans can be written to allow participants to take in-service distributions from their rollover accounts at any time, regardless of age or service. We see more and more plans offering this option; however, there is still a large percentage that applies the age 59 ½ requirement to all money types.
There is an important word of caution here. A rollover is not the same thing as a transfer or a merger. A rollover usually involves an employee leaving one company and going to work for a completely unrelated company; whereas, a transfer or merger often involves movement among related companies.
The reason this matters is that accounts that are merged or transferred from a related company’s plan usually retain their pre-merger characteristics. In other words, a merger of a 401(k) balance from one plan to another is still treated as 401(k) money, which remains subject to the age 59 ½ restriction. In the case of rollover, the amount is considered a rollover regardless of the account type in the prior plan.
This can become especially critical if a plan has accounts that hold amounts transferred/merged from a money purchase pension plan or a defined benefit plan. Those accounts are not available for in-service distribution until the participant reaches age 62.
Other than age, are there other factors a plan can use to allow in-service distributions?
There sure are. The two most common factors beyond age are the length of time an employee has been a participant in the plan and the amount of time an account has accumulated in the plan. These options are only available for match, profit sharing, and rollover accounts.
Five Years of Participation
This option allows any employee who has been a participant for at least 5 years to take an in-service distribution. The five-year clock is typically tracked on an elapsed time method, so if the participant joined the plan on January 1, 2017, he or she completes five years of participation on January 1, 2022 (assuming continuous participation throughout that time frame).
Two Years of Accumulation
This option allows a participant to take an in-service distribution of amounts that have been in the plan for at least two years. This one can be a little tricky to track because it runs on a rolling two-year period based on the date contributions were actually deposited to the plan. So, for example, if a plan sponsor deposits its 2017 profit sharing contribution on September 15, 2018, the earliest date that amount would be available under this option is September 15, 2020 (two years after the deposit date).
It is important to note that if the participant is under age 59 ½ at the time of the in-service distribution, it will be subject to the 10% early withdrawal penalty.
Can in-service distributions be rolled over into an IRA?
As long as the participant is younger than age 70 ½, an in-service distribution can be rolled over to an IRA. A direct rollover would avoid the 10% early withdrawal penalty as well as the mandatory 20% tax withholding.
So, in-service distributions are subject to tax withholding?
Yes, any retirement plan distribution that is eligible to be rolled over is subject to mandatory tax withholding at the rate of 20% if the participant does not elect to directly rollover the distributed amount to an IRA or another plan.
Is it possible for a plan to allow in-service distributions but place some parameters on the provision to control the number of requests?
Indeed. The plan can specify that participants are limited to a maximum number of in-service distributions per year (e.g., one per plan year) or that there is a minimum amount that can be taken (e.g. no less than $1,000). However, since imposing those sorts of restrictions requires that they be monitored, we don’t see them in very many plans.
Another restriction we see a little more frequently is that in-service distributions can only be taken from accounts in which the participant is 100% vested.
If any of these restrictions are to be imposed, they must be written into the plan document and applied consistently across the board to all participants.
