Pre Retirement Distributions

Question 1

What generally happens to early distributions from qualified plans?

Answer 1

They are not permitted, but certain circumstances allow taxable distributions with potential penalties.

Circumstances include death, disability, termination, and hardship withdrawals.

Question 2

What occurs to benefits upon the death of a plan participant?

Answer 2

Benefits usually become fully vested and payable to the designated beneficiary.

This is a standard provision in most retirement plans.

Question 3

What happens to retirement plan benefits if a participant becomes disabled?

Answer 3

Benefits typically become fully vested and payable under the plan provisions once the participant satisfies the definition of disabled.

Disability is often defined as meeting the Social Security definition.

Question 4

What distribution options are available upon termination from a qualified plan?

Answer 4

• Vested portion distribution (subject to withholding and tax penalties)
• Rollover into an IRA or new employer’s plan
• Lump sum
• Installments
• Stock or cash
• Annuity

Lump sum is the most common option.

Question 5

What is an in-service withdrawal?

Answer 5

It allows participants to access retirement funds while still employed, subject to IRS regulations and employer plan design.

Specific rules may vary based on the plan.

Question 6

What are hardship withdrawal safe harbors in defined contribution plans?

Answer 6

• Medical expenses for unreimbursed care
• Down payment and closing costs on a primary residence
• Education expenses for post-secondary education
• Payments to prevent eviction or foreclosure
• Funeral expenses
• Casualty repairs for damage to the principal residence

These are specific conditions under which early distributions may be allowed.

Question 7

What must a participant show to qualify for a hardship withdrawal?

Answer 7

• The distribution does not exceed the amount required to meet the need
• The need cannot be met from other reasonably available resources

These criteria help ensure that hardship withdrawals are justified.

Question 8

What is the penalty for a hardship withdrawal?

Answer 8

A participant is suspended from making elective contributions for six months following a hardship distribution.

This is a measure to prevent abuse of hardship withdrawals.

Question 9

At what age can most plans allow active employees to access their retirement funds?

Answer 9

Age 59½.

This age is a common threshold for accessing retirement funds without penalties.

Question 10

What should employees do with rollover balances from previous employers?

Answer 10

They are encouraged to roll them over into new retirement plans.

This helps in maintaining tax advantages and consolidating retirement savings.

Question 11

In regard to tax on retirement distributions, when do the distributions become taxable?

Answer 11

When the employee takes the distribution during retirement or text

Question 12

Early distributions from retirement plans and a 10% penalty tax - what are exceptions to the 10% penalty?

Answer 12

Distributions over the age of 59 1/2
Death of participant

Medical expenses over 7 1/2% of adjusted gross income

Disability

Termination after age 55

Alternate payee under qualified domestic relations order QDRO

Question 13

What age are participants required to take the minimum distribution?

Answer 13

72

Question 14

What percentage of excise tax is made on distributions not taken before age 72(minimum distribution age)

Answer 14

50%

Question 15

Is the minimum distribution required after age 72 if the employee is still working?

Answer 15

Minimum distribution is mandatory whether the owner is working or retired

Question 16

If an employee fails to make a distribution election and the account balance is $1000 or less what is the employers obligation?

Answer 16

An employer can require employees to take a distribution if the employee fails to make a distribution election

Question 17

If an employee fails to make a distribution election with an account balance of 1000 to 5000 what’s the employers’s obligation?

Answer 17

An employer must automatically roll over the account into an IRA selected by the plan administrator unless the plan participant affirmatively elects to receive the cash or select a different IRA account

Question 18

Roll over withholding rules require plan contributions to be rolled over directly into another qualified plan or IRA. If the contributions are not rolled over, what is the percentage of withholding requirement?

Answer 18

A 20% federal withholding requirement applies to contributions not rolled over to qualify account

Question 19

Under roll over withholding rules can a plan participant elect to split distributions, taking a portion in a lump sum and rolling over the rest?

Answer 19

The participant may retain a portion of a distribution and roll over the remainder into a qualified IRA. The cash portion of the distribution carries a 20% penalty.

Question 20

If an employer plans a full distribution of retirement plan contributions how many days in advance is written notice required

Answer 20

Written notice is required at least 30 days prior and no more than 180 days prior to the distribution

The employee may waive the 30 day notice requirement to receive the distribution

Question 21

What are exceptions to the withholding requirement?

Answer 21

A participant receiving required minimum distributions

Non-taxable distributions

Return of access, referrals, or contributions

Deemed distributions for defaulted plan loans

Hardship distributions

Question 22

Not all retirement plans allow loans for those plans that do allow loans. What’s the maximum allowed?

Answer 22

The maximum allowed is the lesser of 50,000 less the highest outstanding loan balance in the proceeding 12 months(look back rule)

50% of the best that accounts balance

Question 23

What should the interest rate be on a retirement plan loan?

Answer 23

The interest rate charge should be the same as the rate for a comparable loan in the local lending market

Question 24

When is repayment required in regard to a retirement plan loan

What’s the tax treatment on loan repayment?

Answer 24

Repayment is required within five years unless the loan was for a purchase of a primary residence

All loan repayment are made after tax basis

Question 25

Which of the following describes the period of employment recognized in a benefit formula for a retirement calculation purposes

Eligibility

Contributions

Vesting

Credited service

Answer 25

Credited service

Question 26

Which form of retirement contribution allows participants to make after tax contributions, and then take those contributions and earnings completely tax free at retirement

Pretax

Post tax

Roth

Catch up

Answer 26

Roth

Question 27

Which distribution option is most commonly taken upon employees term termination

An annuity

Lump sum

Installments

Stock

Answer 27

Lump sum