Rule of 55

Submitted by Paul Staib on Fri, 2023-12-08 13:26

Must all employer 401k plans enable the “rule of 55” or can the plan rules elect whether or not to enable penalty-free withdrawals upon attaining age 55?

Current 54 year old employed by a company which allows for rule of 55 withdrawals within their 401k plan. Employee has been planning to retire in 2024 upon attaining age 55. It’s highly likely that current employer will be acquired in the next few weeks/months and a preliminary review of acquiring company’s SPD makes no mention of allowing rule of 55 provision.
Is employee eligible for rule of 55 under these potential scenarios (assuming acquiring company does NOT allow rule of 55):
1. employee retires in 2024 PRIOR to finalization of acquisition? Will acquiring company have to abide by prior plan and allow this?
2. employee retires in 2024 AFTER finalization of acquistion, including scenario of acquistion closing in 2023? Any sort of grandfathering here? Are the acquiring company’s benefits triggered day 1 of acquistion?



Submitted by William Tuttle on Fri, 2023-12-08 13:56

  • It is simply one of the enumerated exceptions to the 10% early withdrawal penalty in 72t.
  • The employer has no say in this, regardless of it is stated in the SPD or not. The employer has an IRS requirement to issue a 1099-r for such withdrawals with box 7 coded properly.
  • The bigger issue is what the plan’s post-separation distribution policies are.
  • A plan is only required to offer lump sum distributions. While there would be no 10% early withdrawal penalty. The taxable amount could cause significantly higher marginal tax rates.
  • In this case they could take the lump sum withdrawl, retain the amount needed for the year and/or at desired marginal tax rates and roll the balance over to an IRA. However, the IRA balance would lose the age 55 early withdrawal penalty exception.
  • However, many plans also offer SEPP and RMD style withdrawal options.
  • It is less common for 457b plans to offer full discretionary withdraws after separation.

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