72t’s on 401k and other Employer provided plans

Submitted by Zachariah Hammel on Tue, 2015-07-21 14:33

I have a question about using 72t’s on Employer plans such as 401k’s, Since this is not considered an in-service distribution and this is allowable via the internal revenue code, is it safe to say that all employer plans have to honor the 72t?



Submitted by Alan - IRA critic on Tue, 2015-07-21 19:43

  • Since the employee has separated from service, they can take distributions from the plan. However, plans are not required to offer flexible distribution options. Some plans may even require that any distribution be a lump sum. That said, most plans do allow flexible distributions which would include a fixed annual distribution determined by selecting one of the 3 approved methods in RR 2002-62 and claiming the penalty exception for substantially equal payments.
  • However, it is safer to do an IRA rollover and initiate the plan from the IRA. An IRA can be partitioned into more than one account where one IRA has the balance to generate the distribution required. The other IRA would not be part of the 72t plan and could be used for emergency distributions or even a second plan later on. A 401k does not offer the employee the control they have with an IRA. For example, the plan can change administrators, or in some cases make a late contribution to the plan within the period following separation. If the employee or plan makes an error in the distribution amount which results in too a high a distribution, there is no way to roll the excess distribution back into the 401k to save the 72t plan.

Submitted by Zachariah Hammel on Tue, 2015-07-21 22:05

Since this is a current 401k that she is currently contributing to, I just want to verify that she can do a 72t per RR 2002-62 and the plan should allow for that?

Submitted by Alan - IRA critic on Tue, 2015-07-21 22:29

Earlier you indicated that this was not an in service distribution, but perhaps you meant to say that it was.  A 72t plan will not work for current employees. Any contribution to the plan from any source would bust the plan. Such a contribution could come from employee deferrals, profit sharing or matching contributions or forfeitures of non vested balances from other departing employees. In other words, no contributions or transfers to a 72t plan account are allowed.

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