An owner (100% ownership) wants the money from his 401(k) account. He is not willing to terminate the plan, but wants his own funds. Therefore, he has "terminated" employment as he is no longer on the payroll. However, he has not liquidated any assets, and still owns the business.

My obstinate boss calls this a distributable event. I challenge that under IRS regulations, an owner cannot claim distribution due to termination if he still has a substantial interest in the company.

Am I wrong? Is there justification for the "termination" if Mr. X does not receive compensation directly from the company?

Been there, done that. He is not terminated if he is still working for the company. Has to do loan and hardship to get any money.

Problem for you is ethics and your boss. How long will you be employed after you prove him wrong?

If you are not the fiduciary why should you care? If the owner is a fid and requests payment from a custodian/trustee and the owner has authority to request payment then make the payment.

mbozek - fear of litigation and being put out of business for malpractice. To me that is a good reason.

What to we do? Have the client sign a special letter of indemnification that we had advised against it. In extreme situations we resign from the case. I can think of maybe a dozen cases in the 30 years I have been in this business where this has saved our bacon, not to say our jobs.

You can ask the client for a opinion from a tax advisor that a distribution is permitted. Corporate trustees and custodians would require such a letter because it puts the client on notice and if the client insists on the distribution it becomes the client's responsibility for withdrawing the funds without the opinion.

What does the document read as far as taking an in service distribution? That may be a way to get his $$ out without the termination issue.

In service is allowed at age 59 1/2. However, the owner is only 49. Also, I believe that we have an implied fidicuary liability since our sister company (same ownership) provides ALL the investment advice. Additionally, the plan Trustee asks our advice for all consultative issues and usually follows it. In this regard, I am arguing with our company's owner who wants to see the continuation of basis points fees rather than risk being "unpopular".

From personal experience I'd suggest that if the 100% owner is that adamant about getting his funds out of the Plan, something else might be going on that could affect his ability/desire to pay your fees. Your employer should stay on top of the accounts payable for this particular client, and bill frequently! Good luck.

If he is 100% owner, why doesn't he change the document rule for the in service distribution. He would have to pay tax and 10 % penalty, but if that's what he wants to do. He can get his money out, keep the Plan open for other ee's - pay you a fee for document change - everyone's happy!

You can't have in-service distributions of 401(k) money unless they meet one of the requirements (59-1/2, termination, etc.)

"Have the client sign a special letter of indemnification that we had advised against it. In extreme situations we resign from the case. I can think of maybe a dozen cases in the 30 years I have been in this business where this has saved our bacon, not to say our jobs."

We generally use the same approach that Rcline suggested above. And we have frequently terminated our administrative services contract with a client who insists on dubious transactions. They just aren't worth it.

If the plan sponsor is a corporation, benefits are payable to an employee upon severance of employment which occurs when the employee ceases to be an employee of the employer maintaining the plan. If the owner is off the payroll and not actively working in the business he has a factual basis for claiming a severance of employment. In PLR 8705076 a 100% owner who went off payroll was deemed to have incurred a "severance from service" for purpose of receiving a distribution from a qualified plan even though the owner continued to perform services as an independent contractor for the sponsor.