Plan Design to Drive Your Distribution Objectives

8/29/2022 9:00:00 AM

Bell Bank News

Plan design reviews often focus on when employees can participate in the plan and how plan contributions will be allocated among participants. But plan features that define when and how participants can access their savings can be just as important in achieving the objectives a company sets for its retirement plan.

Do you have a philosophy related to the distribution options available in your plan? For example, do you want to allow access to plan balances while participants are working, or do you want to restrict access until they retire?

Do you want to encourage participants to leave assets in the plan when they retire, or would you prefer former employees close out their accounts when they leave your company? Most plan documents permit a wide variety of distribution options. Your financial advisor is a great resource to help you evaluate whether your plan’s distribution features are meeting your company’s objectives.

Overview of Distribution Options

The distribution rules for retirement savings plans are designed to restrict participants from using their savings before they retire. Participants generally must have a “qualifying event” before they can withdraw their money from the plan.

Distribution Qualifying Events by Contribution Type

Employer Contributions Possible distributable events:
  • Severance from employment
  • Plan termination
  • Fixed number of years
  • Attainment of a certain age
  • Occurrence of a stated event
Employee Pre-Tax and Roth Deferrals

Distributable events restricted to:

  • Severance from employment
  • Attainment of age 59½
  • Disability
  • Death
  • Plan Termination
Rollovers From Other Plans or IRAs
  • Restrictions set by the plan, may allow access at any time

Over the years, the distribution rules have been adjusted to provide more paths for participants to access their savings while they are still working, if certain conditions are met. This chart lists some of the optional plan features plan sponsors may adopt and customize.

In-Service and Hardship Distributions by Contribution Type

Employer Contributions and Employee After-Tax Contributions

In-service distribution without hardship – limitation options:

  • 5 or more years of plan participation
  • Assets to be in plan 2 or more years
  • A certain age
  • In-service distribution with hardship – defined by the plan

    Qualified childbirth or adoption distribution:

  • Up to $5,000 per participant per child
  • May be repaid to plan or IRA
Employee Pre-Tax and Roth Deferrals

Financial hardship – 401(k) safe harbor definition commonly used:

  • Medical expenses
  • Funeral expenses
  • Post-secondary education expenses
  • Cost to repair a principal residence
  • Cost to prevent foreclosure or eviction of a principal residence
  • Qualified childbirth or adoption distribution:

  • Up to $5,000 per participant per child
  • May be repaid to plan or IRA to avoid taxation & restore account
  • Qualified reservist distribution:

  • May be repaid to an IRA

Plan Loans

Participant’s Vested Plan Account
  • Loan terms must meet tax code requirements
  • Plan may set additional loan program requirements
  • Must be repaid with interest

Considerations When Selecting Plan Features

Plan features such as hardship distributions and loans tend to be popular because they help employees feel more comfortable putting money into the plan knowing they can access their savings in the case of an emergency. It is important to weigh the benefits and considerations of each distribution feature and how they could affect your plan’s objectives.


In addition to helping employees feel more comfortable contributing to the plan, robust retirement plan features like loans, childbirth/adoption distributions can serve as a recruiting tool for employers who showcase their employee plan benefits to prospective employees.

Administrative Challenges

A common objective for many plan sponsors is to streamline administrative processes and reduce the staff time needed to support the plan. Sometimes, increasing plan distribution features can add administrative burdens and additional oversight responsibilities. Adding or changing plan features also requires a document amendment, which is typically an added expense for the plan sponsor.

Plan Leakage

Distribution features should be evaluated for the potential for plan leakage, which can harm employees’ chances of accumulating adequate retirement savings. Plan leakage can occur in the form of:

  • Plan loans that are defaulted and never paid back
  • In-service and hardship distributions
  • Loan initiation and administration fees, distribution processing fees
  • Distributions when workers change jobs and don’t roll over their savings to another employer plan or an IRA

Options for Meeting Distribution Objectives

Plan sponsors who want to offer distribution options to their participants but reduce leakage or costs to the plan could consider these strategies:

  • Limit the number of outstanding loans to one at a time
  • Set a minimum loan amount to discourage small loans that may go unpaid
  • Require loans to be paid through payroll deduction to minimize the burden of collecting and processing loan payments
  • Allow in-service distributions only for hardships or upon reaching a stated age
  • Limit the sources available for hardship distributions
  • Educate employees on the tax consequences associated with defaulted loans and distributions before age 59½, as well as on the negative impact early distributions have on retirement readiness

Plan sponsors who want to retain plan assets and help their employees manage their savings through retirement might want to consider these types of strategies:

  • Permit installment payments, such as a set dollar amount each quarter
  • Allow in-plan rollovers to a designated Roth account to help employees accomplish tax planning strategies within the plan without having to roll the assets to Roth IRAs
  • Educate employees on rollover options, including rollovers into your plan and other ways to consolidate their retirement savings
  • Add investment options that help participants personalize their investment portfolios, particularly as they age, such as managed accounts and lifetime income options


Your financial advisor can help you prioritize your objectives for retirement plan distributions. Once you know the approach you want to take, Bell Bank can help you customize your plan features and understand the costs associated with amending and servicing the plan to incorporate those features. Contact your Bell Bank retirement plan consultant for more information.

Information courtesy of Newport Group, Inc., a preferred Bell Bank Wealth Management vendor. This article is for the general information of clients and friends of Bell Bank. It is not intended, nor may it be relied upon, as tax or legal advice with respect to any matter. This article also cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service or other taxing authority.

Products and services offered through Bell Bank Wealth Management are: Not FDIC Insured | No Bank Guarantee | May Lose Value | Not a Deposit | Not Insured by Any Federal Government Agency