10.5 Distribution Restrictions by Contribution Source & Plan Termination Distributions
Key Takeaways
- IRC §401(k)(2)(B) restricts elective deferrals, QNECs, QMACs and safe harbor contributions to distribution on severance, death, disability, attainment of age 59½, plan termination, or hardship (deferrals only).
- Profit-sharing and non-safe-harbor matching contributions may be distributed in service under far looser standards, commonly a two-year seasoning of the contribution or five years of plan participation.
- A plan termination permits distribution of restricted sources only if the employer does not maintain an alternative defined contribution plan — the successor plan rule of Treas. Reg. §1.401(k)-1(d)(4).
- A plan is an alternative defined contribution plan unless fewer than 2% of the terminated plan's eligible employees are eligible for it during the period from 12 months before to 12 months after the distribution.
One Account, Many Rulebooks
A participant sees a single balance. The administrator sees sources, and each source answers to a different statute. Getting a distribution wrong is not a rounding error — distributing a restricted source before a permissible event is a §401(k) operational failure that can disqualify the cash or deferred arrangement.
The Restricted Sources: IRC §401(k)(2)(B)
These money types may be distributed only on a statutorily listed event:
- Elective deferrals (pre-tax and designated Roth)
- QNECs (qualified nonelective contributions)
- QMACs (qualified matching contributions)
- Safe harbor nonelective and safe harbor matching contributions
- QACA contributions
| Permissible event | Available for these sources? |
|---|---|
| Severance from employment | Yes |
| Death | Yes |
| Disability | Yes |
| Attainment of age 59½ | Yes |
| Plan termination (subject to the successor plan rule) | Yes |
| Hardship | Elective deferrals only — not QNECs, QMACs, or safe harbor contributions |
| Attainment of Normal Retirement Age while employed | Only if NRA is 59½ or later; the age 59½ floor governs |
| After a fixed number of years | No |
| Completion of 5 years of participation | No |
Two SECURE 2.0 additions expanded in-service access without disturbing the framework: the §115 emergency personal expense distribution (one per year, up to $1,000, self-certified) and the §314 domestic abuse victim distribution (the lesser of $10,000 indexed or 50% of the vested balance), both penalty-free and repayable.
The Unrestricted Sources
Profit-sharing and non-safe-harbor matching contributions are not subject to §401(k)(2)(B). They are governed by the general rule that a profit-sharing plan may distribute after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event. Two document standards dominate:
- The two-year seasoning rule — amounts that have been in the plan for at least two years may be withdrawn.
- The five-year participation rule — a participant with at least five years of plan participation may withdraw the entire vested profit-sharing and match balance.
Rollover accounts are the least restricted of all: a plan may permit withdrawal of a rollover account at any time, for any reason, because rollover amounts never carried §401(k) restrictions.
Voluntary after-tax contributions may generally be withdrawn at any time, subject to the pro-rata basis recovery rules of IRC §72(e)(8).
Source-by-Source Summary
| Source | In-service before 59½? | Hardship eligible? | Governing rule |
|---|---|---|---|
| Elective deferrals (pre-tax and Roth) | No | Yes | IRC §401(k)(2)(B) |
| QNEC / QMAC | No | No | IRC §401(k)(2)(B) |
| Safe harbor nonelective / match | No | No | IRC §401(k)(2)(B) |
| QACA contributions | No | No | IRC §401(k)(2)(B) |
| Discretionary match (non-safe-harbor) | Yes, per document | Per document | Profit-sharing standard |
| Profit sharing | Yes, per document (2-year / 5-year) | Per document | Profit-sharing standard |
| Rollover account | Yes, any time if the document allows | n/a | No §401(k) restriction |
| Voluntary after-tax | Yes | n/a | IRC §72 basis recovery |
Plan Termination Distributions and the Successor Plan Rule
Plan termination is a distributable event for restricted sources — but only conditionally. Under Treas. Reg. §1.401(k)-1(d)(4), a distribution on account of plan termination is permitted only if the employer does not maintain an alternative defined contribution plan at the relevant time.
What Counts as an Alternative Defined Contribution Plan
A plan is an alternative DC plan if it exists at any time during the period beginning 12 months before and ending 12 months after the date of distribution.
The 2% exception: a plan is not treated as an alternative DC plan if, during that 24-month window, fewer than 2% of the employees who were eligible under the terminating plan are eligible under the other plan.
What Does Not Count
| Other plan maintained | Alternative DC plan? |
|---|---|
| Another 401(k) or profit-sharing plan | Yes — blocks distribution |
| Money purchase pension plan | Yes — it is a defined contribution plan |
| Defined benefit plan | No |
| ESOP | No |
| SEP | No |
| SIMPLE IRA | No |
| 403(b) plan | No |
| 457(b) plan | No |
| Plan under which fewer than 2% of the terminated plan's eligibles participate | No — the de minimis exception |
Worked example. Calder Industries terminates its 401(k) on June 30, 2026 and intends to distribute all accounts on September 15, 2026. The lookback/look-forward window therefore runs from September 15, 2025 through September 15, 2027.
- Scenario A: Calder sponsors a defined benefit plan covering the same workforce. A DB plan is not a defined contribution plan, so it is not an alternative DC plan. Distributions may proceed.
- Scenario B: Calder establishes a new profit-sharing plan in January 2027 covering all employees. That falls inside the window. The 401(k) accounts may not be distributed on account of termination; participants must wait for another distributable event, and amounts already distributed are an operational failure.
- Scenario C: Calder maintains a small money purchase plan covering 1.2% of the terminated plan's eligible employees. A money purchase plan is a DC plan, but fewer than 2% of eligibles participate, so the de minimis exception applies. Distributions may proceed.
Where the successor plan rule blocks distribution, the standard alternative is a plan-to-plan transfer of accounts into the successor plan, which preserves each source's original distribution restrictions.
Common ASPPA QKA Exam Traps
- Trap 1 — Hardship from safe harbor money. Hardship reaches elective deferrals only; safe harbor, QNEC and QMAC amounts are never hardship-eligible.
- Trap 2 — Believing a DB plan blocks termination distributions. Only a defined contribution plan is an alternative plan.
- Trap 3 — Measuring the window from the termination date. It runs 12 months before to 12 months after the distribution, not the termination.
- Trap 4 — Applying the two-year seasoning rule to deferrals. It applies only to profit-sharing and non-safe-harbor match money.
- Trap 5 — Forgetting that a money purchase plan is a DC plan for successor plan purposes.
- Trap 6 — Misreading the 2% test. It is fewer than 2% of the terminated plan's eligible employees, not 2% of the new plan's participants.
A participant under age 59½ with a financial hardship has elective deferrals, safe harbor matching contributions, and a profit-sharing account. Which sources may fund a hardship distribution?
Calder Industries terminates its 401(k) on June 30, 2026 and plans to distribute all accounts on September 15, 2026. It also maintains a defined benefit plan covering the same employees. May the 401(k) accounts be distributed on account of the termination?
An employer terminating its 401(k) maintains a money purchase plan under which 1.2% of the terminated plan's eligible employees participate. What is the effect on termination distributions?