3797 / What restrictions apply to distributions from 401(k) plans?

Amounts held by the trust that are attributable to employer contributions made pursuant to the election to defer may not be distributed to participants or beneficiaries prior to:

(1)  the employee’s death, disability, or severance from employment;

(2)  certain plan terminations, without the establishment or maintenance of another defined contribution plan;

(3)  in the case of a profit sharing or stock bonus plan, the employee’s reaching age 59½;

(4)   experiencing financial hardship ( Q 3798) (for years beginning before January 1, 2019, limited to distributions from a profit sharing or stock bonus plan and not permitted from other plans);

(5)  in the case of a qualified reservist distribution, the date of the reservist’s order or call;¹ or

(6)  Under the SECURE Act, withdrawals of up to $5,000 for up to one year following the birth or legal adoption of a child. Adopted children generally include children under age 18, but can also include someone who has reached age 18 but is physically or mentally disabled and incapable of self-support.²

These occurrences are referred to as “distributable events.” Amounts may not be distributable merely by reason of completion of a stated period of participation or the lapse of a fixed number of years.³

The cost of life insurance protection as per Table 2001 or the insurer’s qualifying lower published term rates ( Q 3948) provided under the plan is not treated as a distribution for purposes of these rules. Neither is the making of a loan that is treated as a deemed distribution even if the loan is secured by the employee’s elective contributions or is includable in the employee’s income under IRC Section 72(p).

The reduction of an employee’s accrued benefit derived from elective contributions (i.e., an offset distribution) by reason of a default on a loan is treated as a distribution ( Q 3953).⁴ The IRS has privately ruled that a transfer of 401(k) elective deferrals or rollovers to purchase service credits would not constitute an impermissible distribution from the plan and are not a violation of the separate accounting requirement.⁵

Restrictions on distributions of elective contributions generally continue to apply even if the amounts are transferred to another qualified plan of any employer.⁶ Amounts transferred to a 401(k) plan by a direct rollover from another plan do not have to be subject to these restrictions.⁷ See Q 3780 for discussion of in-plan Roth distributions. See Q 3787 for a discussion of penalty-free rollovers from 401(k) plan accounts into Roth 401(k) accounts. Final regulations state that rollover amounts may be excepted from the timing restrictions on distributions applicable to a receiving plan, provided there is a separate accounting for such amounts.⁸

If an eligible retirement plan separately accounts for amounts attributable to rollover contributions to the plan, distributions of those amounts are not subject to the restrictions on permissible timing that apply, under the applicable requirements of the Internal Revenue Code, to distributions of other amounts from the plan. Accordingly, the plan may permit the distribution of amounts attributable to rollover contributions at any time pursuant to an individual’s request.

Thus, for example, if the receiving plan is a money purchase pension plan and the plan separately accounts for amounts attributable to rollover contributions, a plan provision permitting the in-service distribution of those amounts will not disqualify the plan.⁹