“We sponsor an ERISA 403(b) plan that does not permit in-service withdrawals, even at age 59.5 or for hardship. Recently, a long-term employee (hired in 1980) claimed that she has a small amount of what the plan recordkeeper called ‘grandfathered’ money that she could withdraw while still employed. I read the plan document, and it does say something about a ‘12/31/88 account balance,’ but the language is quite confusing! Is this employee correct?” 

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

Yes, it is possible that the employee is correct here, but you have to take both your plan language and the investment vehicle holding the 12/31/88 account balance into consideration. Under the regulations, a 403(b) plan may allow employees to take certain in-service distributions, such as when they reach age 59.5 or they encounter a financial hardship. In addition, as noted by your employee, they may be permitted to take an in-service distribution of their 12/31/88 (“grandfathered”) account balance. 

More specifically, pre-1989 deferrals and attributable earnings invested in an annuity contract can be distributed in-service at any time. For any such amounts held in a custodial account, distributions in-service are only permitted in the event of a hardship. The caveat is that such distributions are only permitted to the extent provided under your plan terms (as such, a 403(b) plan may be more restrictive than the regulations with respect to permitted in-service distributions). Therefore, you need to check your plan document to see whether (and the extent to which) it permits in-service withdrawals of an employee’s 12/31/88 account balance. As you note that the language may not be entirely clear, it may be helpful to consult retirement plan counsel well-versed in such matters to assist with a correct interpretation.

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.