401k Resource Guide
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401(k) Resource Guide - Plan Participants - General Distribution Rules Generally, distributions of elective deferrals cannot be made until one of the following occurs:
Depending on the terms of the plan, distributions may be:
In certain circumstances, the plan administrator must obtain your consent before making a distribution. Generally, if your account balance exceeds $5,000, the plan administrator must obtain your consent before making a distribution. Depending on the type of benefit distribution provided under your 401(k) plan, the plan may also require the consent of your spouse before making a distribution. Your plan may provide that rollovers from other plans are not included in determining whether your account balance exceeds the $5,000 amount. If a distribution in excess of $1,000 is made, and you (or your designated beneficiary) do not elect to (i) receive the distribution directly or (ii) make an election to roll over the amount to an eligible retirement plan, the plan administrator is required to transfer the distribution to an individual retirement plan of a designated trustee or issuer and must notify you (or your beneficiary) in writing that the distribution may be transferred to another individual retirement plan. Distributions from your 401(k) plan are taxable unless the amounts are rolled over as described below in the section titled, “Rollovers from your 401(k) plan.” If you receive a lump-sum distribution from a 401(k) plan and you were born before 1936, you may be able to elect optional methods of figuring the tax on the distribution. More information on the optional methods can be found in Publication 575, Pension and Annuity Income, and in the Form 4972 Instructions, Tax on Lump-Sum Distributions. Required distributions. A 401(k) plan must provide that you will either:
These required distribution rules apply individually to each qualified plan. You cannot satisfy the requirement for one plan by taking a distribution from another plan. The plan document must provide that these rules override any inconsistent distribution options previously offered. Minimum distribution. If your account balance is to be distributed, the plan administrator must determine the minimum amount required to be distributed to you each calendar year. Information to help you figure the minimum distribution amount is included in Publication 575. The required beginning date is April 1 of the first year after the later of the following years:
However, a plan may require you to begin receiving distributions by April 1 of the year after you reach age 70½, even if you have not retired. If you are a 5% owner of the employer maintaining the plan, then you must begin receiving distributions by April 1 of the first year after the calendar year in which you reach age 70½. Additional information to help you determine your required beginning date is included in Publication 575. Distributions after the starting year. The distribution required to be made by April 1 is treated as a distribution for the starting year. (The starting year is the year in which you reach age 70 ½ or retire, whichever applies, to determine your required beginning date, above.) After the starting year, you must receive the required distribution for each year by December 31 of that year. If no distribution is made in the starting year, required distributions for 2 years must be made in the next year (one by April 1 and one by December 31). Distributions after participant's death. Publication 575 includes information to help you understand the special rules covering distributions made after the death of a participant. Hardship distributions. A 401(k) plan may allow you to receive a hardship distribution because of an immediate and heavy financial need. Hardship distributions from a 401(k) plan are limited to the amount of the employee’s elective deferrals and generally do not include any income earned on the deferred amounts. If the plan permits, certain employer matching contributions and employer discretionary contributions may also be included in hardship distributions. Hardship distributions cannot be rolled over to another plan or IRA. A distribution is treated as a hardship distribution only if it is made on account of the hardship. For purposes of this rule, a distribution is made on account of hardship only if the distribution is made both on account of an immediate and heavy financial need of the employee and is necessary to satisfy that financial need. The determination of the existence of an immediate and heavy financial need and of the amount necessary to meet the need must be made in accordance with nondiscriminatory and objective standards set forth in the plan. A distribution on account of hardship must be limited to the distributable amount. The distributable amount is equal to your total elective deferrals as of the date of distribution, reduced by the amount of previous distributions of elective contributions. Immediate and heavy financial need. Whether an employee has an immediate and heavy financial need is to be determined based on all relevant facts and circumstances. A distribution made to an employee for the purchase of a boat or television would generally not constitute a distribution made on account of an immediate and heavy financial need. A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee. A distribution is deemed to be on account of an immediate and heavy financial need of the employee if the distribution is for:
Note: The final 401(k) regulations were published in December 2004 and apply for plan years beginning on or after January 1, 2006. However, plan sponsors are permitted to apply these final regulations in the current plan year. Check with your plan administrator to see if your plan has been amended to apply the new hardship rules provided for under the final regulations. The final regulations add the following expenses to those deemed to be immediate and heavy financial needs:
Distribution necessary to satisfy financial need. A distribution may not be treated as necessary to satisfy an immediate and heavy financial need of an employee to the extent the amount of the distribution is in excess of the amount required to relieve the financial need or to the extent the need may be satisfied from other resources that are reasonably available to the employee. This determination generally is to be made on the basis of all relevant facts and circumstances. The employee’s resources are deemed to include those assets of the employee’s spouse and minor children that are reasonably available to the employee. Thus, for example, a vacation home owned by the employee and the employee’s spouse, whether as community property, joint tenants, tenants by the entirety, or tenants in common, generally will be deemed a resource of the employee. The amount of an immediate and heavy financial need may include any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution. An immediate and heavy financial need generally may be treated as not capable of being relieved from other resources reasonably available to the employee if the employer relies upon the employee’s written representation, unless the employer has actual knowledge to the contrary, that the need cannot reasonably be relieved:
A need cannot reasonably be relieved by one of the actions listed above if the effect would be to increase the amount of the need. For example, the need for funds to purchase a principal residence cannot reasonably be relieved by a plan loan if the loan would disqualify the employee from obtaining other necessary financing. A distribution is deemed necessary to satisfy an immediate and heavy financial need of an employee if all of the following requirements are satisfied:
Rollovers from your 401(k) plan. A rollover occurs when you receive a distribution of cash or other assets from one qualified retirement plan and contribute all or part of the distribution within 60 days to another qualified retirement plan or traditional IRA. This transaction is not taxable but it is reportable on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. and your federal tax return. You can roll over most distributions except for:
Any taxable amount that is not rolled over must be included in income in the year you receive it. If the distribution is paid to you, you have 60 days from the date you receive it to roll it over. Any taxable distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll the distribution over later. If the distribution is rolled over, and you want to defer tax on the entire taxable portion, you will have to add funds from other sources equal to the amount withheld. You can choose to have your 401(k) plan transfer a distribution directly to another eligible plan or to an IRA. Under this option, no taxes are withheld. If you are under age 59 ½ at the time of the distribution, any taxable portion not rolled over may be subject to a 10% additional tax on early distributions (described below). For further information about rollovers and transfers, refer to Publication 575, Pension and Annuity Income and Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). Tax on early distributions. If a distribution is made to you under the plan before you reach age 59½, you may have to pay a 10% additional tax on the distribution. This tax applies to the amount received that you must include in income. Exceptions. The 10% tax will not apply if distributions before age 59 ½ are made in any of the following circumstances:
Reporting the tax. To report the tax on early distributions, you may have to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. See the Form 5329 instructions for additional information about this tax. Loans from 401(k) plans. Some 401(k) plans permit participants to borrow from the plan. The plan document must specify if loans are permitted. A loan from your employer’s 401(k) plan is not taxable if it meets the criteria below. Generally, if permitted by your plan, you may borrow up to 50% of your vested account balance up to a maximum of $50,000. The loan must be repaid within 5 years, unless the loan is used to buy your main home. The loan repayments must be made in substantially level payments, at least quarterly, over the life of the loan. You must reduce the $50,000 amount, above, if you already had an outstanding loan from the plan (or any other plan of your employer or related employer) during the 1-year period ending the day before the loan. The amount of the reduction is your highest outstanding loan balance during that period minus the outstanding balance on the date of the new loan. Certain participant loans may be treated as taxable distributions. For more information, refer to the section, “Loans Treated as Distributions,” in Publication 575. Before you borrow from your 401(k) plan! Have you considered other loan sources? Borrowing from your plan may have a negative impact on the earnings of your account and reduce the money you will eventually have available for your retirement.
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