Question: Why are some employees not able to take money out of their 401(k) account unless they leave the company?

Answer: Company retirement plans receive special tax treatment, so the IRS has restrictions on when money can be withdrawn from a 401k account in order to prevent people from using it as a regular bank account.

However, there are four optional ways to withdraw money from a retirement plan if the provisions are included in the plan document. The withdrawal provisions detailed below are optional so even if an employee worked somewhere else and that plan allowed for these type of withdrawals, doesn’t mean the employee’s current plan will allow for these withdrawal provisions too.

Four optional ways to withdraw money from a retirement plan:

1. Termination of Employment
The 401(k) must allow a participant or beneficiary to withdraw money from the plan at normal retirement age and upon death. Many retirement plans allow for earlier withdrawal such as upon termination of employment. A participant on disability can also receive permission to withdraw funds from the plan.

2. In-Service
The most common in-service withdrawal language in a 401(k) plan is after a participant reaches age 59-and-a-half. If a participant is still employed, employee 401(k)/Roth deferral and/or safe harbor and Qualified Non-Elective Employer Contribution (QNEC) type money is not allowed to be withdrawn before age 59-and-a-half unless there is a hardship purpose attached as defined below. The plan has the option to allow for discretionary employer funds to be withdrawn after reaching a certain age defined in the plan or after being a participant in the plan for a specific length of time.

3. Hardship
Withdrawal requests due to hardship are going to be subject to certain restrictions if even offered in the plan. A hardship purpose is either defined by the IRS or the Plan Sponsor. Safe harbor or QNEC type money cannot be withdrawn for this purpose and generally neither can the earnings on 401(k) or Roth contributions until after January 1, 2019. Discretionary employer funds and earnings can be used for a hardship withdrawal request if the plan allows it.

4. Loan  
This optional distribution is included in some plans with the understanding that the participant will use their own after-tax money to repay their loan from the plan.  Usually, the loan must be repaid within a five year payback period and payments are usually processed through payroll. If a participant has an overriding distribution event such as termination of employment, the loan will often become due and payable immediately or any outstanding balance becomes taxable.

If an employee is not allowed to withdraw the funds unless they leave the company, either the plan document doesn’t allow for hardship distributions, their request may not qualify as a plan defined hardship, they may not be old enough to take an in-service withdrawal, and/or your plan may not allow for loan distributions.  Companies can elect to add any of the optional distributions that would allow the participant an option to take a withdrawal without leaving the company. Adding a hardship provision and an age of 59-and-a-half in-service provision is usually recommended. Adding a loan provision is not always advisable because of the additional complexity to the plan and additional monitoring required for the payroll person.

Funds can be accessed for withdrawal from 401k retirement plans, but not for the same reason at all companies. Contact us today to understand what provisions are included in company plans and how funds can be withdrawn.