Age 55 distributions from a qualified 401k plan
I have a client who sold is business to an unrelated 3rd party. The 3rd party is keeping the seller’s 401k plan alive and will be allowing all retained employees, including my client, to participate in the plan. My client is over age 55 (under age 59 1/2) and is convinced he can take distributions from the 401k plan and roll them over to a rollover IRA. My client is still working for his company which is now a subsidiary of the purchasing company. Besides not knowing if the 401k plan allows for in service distributions, I’m awaiting a copy of the plan document, I do not believe he can take an age 55 distribution without separation of service. And if he could all it would do was exempt him from the 10% early distribution penalty. He would have to pay income tax on the distribution and not be allowed to roll it over to his IRA, correct?
Permalink Submitted by Alan - IRA critic on Mon, 2025-01-06 12:36
If the client will be continuing employment with the successor firm, he would normally not be treated as having separated from service. If under 59.5 he could not distribute his elective deferrals, but the plan provisions might allow him to distribute matching contributions and gains.
The age 55 penalty exception only applies to distributions not rolled over, but he apparently wants to do a direct rollover, so the penalty is moot. It’s just a question of whether the plan provisions allow a distribution at all if he is not separated from service.
Most likely, he would only qualify as having separated from service, if he was no longer able to contribute to the plan, remained as an independent consultant or cut back hours enough to no longer qualify to participate.
The plan administrator should be able to clarify these issues, but the plan should be careful to avoid making an incorrect decision which would have to be corrected under EPCRS.