401k plans that penalize in service withdrawals of after tax money

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Topic Author
bb
Posts: 325
Joined: Wed Apr 25, 2007 10:04 pm

401k plans that penalize in service withdrawals of after tax money

Post by bb »

Current and former company penalize in service withdrawals of after tax money
in the 401k plan (which has to be contributed to the traditional 401k) -
believe it is 6 month suspension from plan participation and company match.

(Q1)
Any theory on why some companies do and some companies do not penalize withdrawals
of after tax money?

(Q2)
Would you still contribute after tax money to 401k (current plan allows in-plan conversion to
roth 401k) if you couldn't withdraw to a roth ira w/o penalty?
Last edited by bb on Fri Jan 22, 2016 10:36 am, edited 2 times in total.
Twins Fan
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Joined: Fri Mar 08, 2013 1:02 pm

Re: 401k plans that penalize in service withdrawals

Post by Twins Fan »

So, you are talking Roth 401k here? You may want to change your title and post, it's tough to follow.

I believe Roth 401k is different than a Roth IRA, in that you can't withdraw contributions anytime from the Roth 401k.
ERISA Stone
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Re: 401k plans that penalize in service withdrawals

Post by ERISA Stone »

The six month rule you reference seems to indicate a hardship distribution. If so, there is a minimum 6 month suspension on deferrals. This is not plan specific.

There are several types of in-service distributions. Some companies may limit the # of distributions you take, but the hardship is the only one that has a mandatory deferral suspension.
Topic Author
bb
Posts: 325
Joined: Wed Apr 25, 2007 10:04 pm

Re: 401k plans that penalize in service withdrawals of after tax money

Post by bb »

No - not talking hardship withdrawal.

After tax contributions mean after you have either contributed the max annual contribution to
401k/roth 401k and put extra money in it goes to regular 401k.
Geologist
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Re: 401k plans that penalize in service withdrawals of after tax money

Post by Geologist »

Q1: A former employer had a two-pronged attitude: First, the 401k was a key part of the retirement system for employees and employees withdrawing funds (this was back when the only option was to a non-retirement taxable status) were defeating the retirement intention. Second, the employees were gaming the system to get the employer match (that is, contributing to get the match and then withdrawing their contribution). So this employer wanted to discourage the practice.

Q2: I have no strong opinion, because a) my current plan doesn't allow in-service withdrawals at all and b) my 401k contributions are almost all pre-tax.
ERISA Stone
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Re: 401k plans that penalize in service withdrawals of after tax money

Post by ERISA Stone »

bb wrote:No - not talking hardship withdrawal.

After tax contributions mean after you have either contributed the max annual contribution to
401k/roth 401k and put extra money in it goes to regular 401k.
Any chance you could post the language from the SPD? It's been a while since I've encountered any discussion on this, but I seem to recall that you cannot put a stipulation on a contribution based on a distribution provision in the plan, hardships the exception. I could be wrong but that doesn't sound right.

ETA: This article indicates that a plan can suspend a non-hardship in-service withdrawal. http://www.anthonycap.com/blog/service- ... plan-rules
Last edited by ERISA Stone on Fri Jan 22, 2016 10:55 am, edited 1 time in total.
Geologist
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Re: 401k plans that penalize in service withdrawals of after tax money

Post by Geologist »

ERISA Stone may also be right that there were external rules that governed my former employer's plans. I knew of employees who did make after-tax contributions so they could withdraw them (within the plan's rules, avoiding the suspensions), prinicipally because they were living beyond their means. That's the main reason I remember that there were suspension rules.
ERISA Stone
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Re: 401k plans that penalize in service withdrawals of after tax money

Post by ERISA Stone »

Looks like I'm not correct.

I have found a couple of articles that reference a suspension on non-hardships http://www.raymondjames.com/newyork/doc ... Withdr.pdf
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Earl Lemongrab
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Re: 401k plans that penalize in service withdrawals of after tax money

Post by Earl Lemongrab »

My company does not penalize after-tax contribution withdrawal (luckily) but it does penalize distribution of company contributions. Those, like after-tax, are allowed for in-service distribution at any age. The penalty is six months suspension of matching, although not participation in the plan. Needless to say, that makes it a non-starter for most. Likely the only ones who'd be doing that would be in financial distress, as it's required to distribute those before a hardship withdrawal of employee deferrals/Roth can be taken.

Earl
SRenaeP
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Re: 401k plans that penalize in service withdrawals of after tax money

Post by SRenaeP »

bb wrote:Current and former company penalize in service withdrawals of after tax money
in the 401k plan (which has to be contributed to the traditional 401k) -
believe it is 6 month suspension from plan participation and company match.

(Q1)
Any theory on why some companies do and some companies do not penalize withdrawals
of after tax money?

(Q2)
Would you still contribute after tax money to 401k (current plan allows in-plan conversion to
roth 401k) if you couldn't withdraw to a roth ira w/o penalty?
My MegaCorp has a similar stipulation.

Q1 - I don't know why.

Q2 - For me, the answer is no until I'm closer to retirement (<5 years). I started a thread maybe six months ago that led to me deciding against it. For now, I'm sticking to taxable.

-Steph
Alan S.
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Re: 401k plans that penalize in service withdrawals of after tax money

Post by Alan S. »

The addition of in plan Roth rollovers (IRRs) to the tax code in 2010 was legislation sponsored by employer plans for the main purpose of retaining assets in their plans both during employment and after separation from employment. The attraction of Roth IRAs was not the major reason for rollovers out of a plan, but it still was cited as a reason many employees rolled funds out of their employer plan. It was expected that IRRs would provide a similar option for employees and would therefore preserve plan assets. Higher plan balances can be used as leverage to reduce administration and management fees for the plan.

IRS guidance (Notice 2013-74) regarding IRRs were released allowing IRRs to be done from plan balances which were otherwise distributable (ODAs) and more recently extended to plan balances that are otherwise non distributable (ODAs). Since after tax sub accounts had historically been treated as distributable upon request by employers, the recent addition of ODAs provided some plans with the apparent opportunity to change the plan provisions to eliminate the in service distribution option for the sub account. Since otherwise non distributable amounts can still be used for an IRR, this change would have enabled active employees to direct these balances to an IRR, but not to request a distribution outside the plan. If so, the Roth IRA destination was eliminated in favor of the designated Roth at least until after separation.

It is not clear that these plans have proceeded in that manner. Copies of the plan document need to be reviewed to determine exactly what the current provisions are and when they were amended. Needed detail may not be contained in an SPD. From other posts made it is clear that many plans provide a destination option of either the designated Roth (IRR) or a Roth IRA (qualified rollover contribution) since requests for analysis of the differences have been posted in greater numbers recently.
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