Is an in-service distribution eligible for rollover? 

Yes.

OVERVIEW
In-service withdrawals prior to normal retirement age are only permitted under Profit Sharing, 401(k) and Stock Bonus Plans.  A plan is not required to offer in-service withdrawals and can place restrictions on the availability of funds.  Special restrictions apply in connection with Cash or Deferred Plans.  Such plans are only permitted to allow the withdrawal of employee pre-tax elective deferrals upon a plan-defined hardship or upon attainment of age 59½.  The withdrawal of certain types of employer-related contributions is governed by plan terms.  Since withdrawals are treated as distributions, amounts paid are generally subject to income tax and may be subject to early distribution penalties if received prior to age 59½.

EMPLOYER RELATED CONTRIBUTIONS
A Profit Sharing or Stock Bonus Plan, including a plan with Cash or Deferred provisions, is permitted to allow participants to withdraw all or a portion of their vested employer related contributions, other than “Safe-Harbor and Qualified” contributions.  The regulations require that withdrawals be limited to amounts credited to a participant's account for a minimum of two years or that the withdrawal option only be available to participants with five years of plan participation.  The plan may contain conditions other than those required under the regulations relating to the early distribution of employer related contributions.  Such additional conditions could include age or service requirements and withdrawals could be limited based on the purpose of the withdrawal.  Participants could also be required to withdraw employee after-tax contributions and rollovers before employer related contributions.

Non-Safe Harbor Matching or Nonelective Contributions
Fixed number of years, either:

• Funds that have been in the plan for at least two years (Rev. Ruling 71-295), or
• After 5 years of participation (Rev. Ruling 68-24)

A plan document may provide for distribution upon a stated event or age, in which case neither of the above items have to be met. Typical provisions include:

• Attainment of age 59½.
• Attainment of age 70½
• Attainment of normal retirement age
• Attainment of an age between 59½ and 70½
• Vested amounts only.

IN-SERVICE CRITERIA BY CONTRIBUTION SOURCE
A plan may be designed so that the source for in-service distributions is across all contribution types or it may be broken down by specific contribution type. Thus, the employer has the flexibility to permit, or not permit, particular contribution types to be available for in-service distribution. 

Whatever the employer’s choices, they need to be spelled out in the plan document and communicated to the employees.

EMPLOYEE RELATED CONTRIBUTIONS
Rollovers and Transfers
There are generally no restrictions on the withdrawal of rollovers received from another plan. However, a plan may have restrictions.  “Transfer “ contributions are usually limited by any restrictions that applied in the transferring plan.  Thus, money purchase contributions transferred to a profit-sharing plan are subject to the same withdrawal restrictions that applied in the money purchase plan.

Voluntary After-Tax Amounts (Not Roth)
After-tax contributions made prior to 1987 may be withdrawn at any time, provided that they can be identified. The earnings on these after-tax contributions may be withdrawn, but do not have to be.

After-tax contributions made after 1986 may only be withdrawn with a pro-rata portion of the earnings thereon. There is a formula for calculating the earnings.

For reference the formula is the amount of the earnings to be withdrawn determined by using the formula: DA [1-(V ÷ V+E)], where DA is the distribution amount, V is the amount of Voluntary Contributions and V+E is the amount of Voluntary Contributions plus the earnings attributable thereto.

If the earnings on the after tax contributions can not be determined, the withdrawal will have to be calculated using all earnings.

Elective Deferrals
Employee elective deferrals (pre-tax or Roth) may only be withdrawn as a result of hardship (covered below) or for any reason after the participant attains age 59½.

If the plan’s normal retirement age is less than 59½, it is not a distributable event for elective deferrals, which generally may not be withdrawn while in-service until age 59½.

Roth Deferrals
Like pre-tax deferrals, in-service is not available until after age 59½. If withdrawing only part of Roth deferral account then the distribution must be treated as pro-rata deferral and earnings. This may cause taxation despite the otherwise tax-free status of the earnings if it is not a qualified distribution.

Safe Harbor Contributions, QNECs, QMACs
These contributions are not available for in-service distribution until the participant attains age 59½, not even for hardship purposes. 

QNECs and QMACs contributed prior to about 1989 are available for hardship prior to age 59½, if they can be identified (details in the hardship section).

MONEY PURCHASE PLANS, INCLUDING TARGET BENEFIT PLANS
Generally, in-service distribution is not permitted in a money purchase plan. However, effective as of the 2007 plan year, the Pension Protection Act of 2006 has added that in-service distributions may be made at age 62, even if normal retirement age is later. 

A plan document may also be written to permit in-service distribution in a money purchase plan upon a participant’s attainment of normal retirement age.

Note: Money purchase and target benefit plan distributions are subject to the joint and survivor annuity rules that require spousal consent.

Withdrawing of funds as an in-service distribution does NOT prohibit a participant from participating in future contributions.

For even more information on in-service distributions and in-depth information on hardship distributions AND more, why not sign-up for our eSeminar? Click here for more information.