Should a governmental employer amend Its 457 plan to permit in-service withdrawals at age 59½?

Written by Mary Graf

Plan sponsor considerations for amending the in-service withdrawal age to 59½

Ease of administration and participant satisfaction

• Plan sponsors that also maintain a 403(b) plan and/or a pre-existing 401(k) plan that permits in-service withdrawals at age 59½ may desire to lower the in-service withdrawal age to 59½. The uniformity also creates the potential to have one set of in-service withdrawal rules.
• Even if an employer does not sponsor another plan, the change will likely be viewed as an enhancement by those plan participants that want access to their plan assets prior to retirement.

Participant considerations in offering in-service withdrawals at age 59½

• Since most employees tend to retire prior to age 70½, retaining that age for an in-service withdrawal is of limited utility. Lowering the in-service withdrawal age to 59½ provides employees with a practical withdrawal option while they are still employed.
• An in-service withdrawal will be reported as a taxable distribution to the plan participant, except for qualified Roth distributions. In addition withdrawals originating from governmental 457(b) plan sources are generally not subject to the 10% tax penalty under Code Section 72(t).
• Taking an in-service withdrawal will reduce a participant’s retirement account assets and leave the participant with a lower retirement plan balance than they would have had if the distribution were never taken.

Plan sponsor best practices

There are several factors to consider when contemplating lowering the in-service withdrawal age for your governmental 457(b) plan. Among these are:

• Required state law conformity - Although the Act amended the federal Internal Revenue Code to permit withdraws at age 59½, it is important to verify that applicable state and/or local laws permit in-service withdrawals at age 59½, or whether enabling legislation is needed.
• Required plan amendment - If a governmental employer decides to permit in-service withdrawals at age 59½, the Plan sponsor must amend the 457(b) plan document for this optional feature. Under current IRS guidance, for plans operating under the lowered in-service withdrawal age, the deadline to amend the plan document for this provision is December 31, 2029.
• Plan communications and review of withdrawal forms and procedures - The Plan sponsor should review its Plan communications, forms and procedures to ensure Plan participants are aware of the new withdrawal option and that appropriate procedures are in place to facilitate the withdrawal.

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Mary Graf is an Advanced Markets Consultant within the Technical Services Department serving tax exempt retirement clients at Voya Financial. In this capacity, she provides general legislative, regulatory and compliance information to assist tax exempt sponsors with compliantly operating their retirement plan. She has 25 years of experience in the Financial Services industry performing in various roles.