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3rd Party Administrator Claims Narrow Distribution Criteria

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Z

ZANDSTRA

Guest
What is the name of your state?Michigan
I have a question regarding the legality of a clause within a 401K plan document. If someone could provide insight, I would very much appreciate it.

Our 401K plan is administered by a large payroll processing institution, who also prepares our payroll checks and payroll tax returns.

We have an employee who recently changed status from full time to part time, and wants to "cash out" her 401K plan. The funds in the plan that are allocated to her are vested. She is still employed by our firm - part time.

Our administrator states that they can't perform a voluntary cash out unless the employee :
Retires
Dies
Becomes disabled (more than 1 year)

When on the phone, the administrator references that the above clause is for tax purposes (probably a prohibited transaction). My answer is why can't you dissolve your 401K, and pay the penalty and the tax on the distributions?

Is there a law or cite that supports what they are saying/doing?

Thanks

Doug

[email protected]
 
Last edited:


Beth3

Senior Member
"My answer is why can't you dissolve your 401K, and pay the penalty and the tax on the distributions?" Because federal law doesn't allow it. As long as the employee is employed with this company, she cannot "cash out" her 401(k) Plan. It's not even debatable.

"Is there a law or cite that supports what they are saying/doing?" I imagine it's in section 401(k) of the tax code. I can tell you that your Plan Administrator is 100% correct in their interpretation of the administration and distribution requirements for 401(k) plans.
 

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