(b)lines Ask the Experts – Are 415(m) Plans Subject to the Premature Distribution Penalty?

Stacey Bradford, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, retirement plan services, Cammack Retirement Group, answer:

Before we get to our response, we should probably explain what a 415(m) plan is to everyone. As detailed in a prior Ask the Experts column, a 415(m) plan is a plan for public employers that is utilized for contributions that cannot be made to a 403(b) or other qualified plan, including a defined benefit (DB) plan, due to the application of the contribution/benefit limits under Internal Revenue Code (IRC) Section 415.

To find out if distributions from 415(m) plans are subject to the 10% premature distribution penalty in the event that a participant takes a distribution prior to age 59 1/2 (and does not qualify for another exception to the penalty, such as termination of employment in the calendar year in which an employee turns age 55 or older), we would consult IRC Section 4974(c), which identifies the types of plans that are subject to the penalty, as follows:

(c) Qualified retirement plan. For purposes of this section, the term “qualified retirement plan” means—

(1) a plan described in section 401(a) which includes a trust exempt from tax under section 501(a),

(2) an annuity plan described in section 403(a),

(3) an annuity contract described in section 403(b),

(4) an individual retirement account described in section 408(a), or

(5) an individual retirement annuity described in section 408(b).

Such term includes any plan, contract, account, or annuity which, at any time, has been determined by the Secretary [of Labor] to be such a plan, contract, account, or annuity.

Notice the absence of 415(m) in the list of plans here? That is why such plans are not subject to the 10% penalty. This makes sense, given that these plans are nonqualified plans, similar to 457(b) deferred compensation plans in many aspects—even though nowadays governmental 457(b) plans have to be funded—and 457(b) plans are also not subject to the 10% premature distribution penalty. However, there is sometimes talk about changing that.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.