A DB plan covers the owner and several of his employees. The owner borrowed $50,000 in 2003 but the loan went in default during 2004 and was considered a deemed distribution. He now wants to take out another $55,000 from the plan and an early retirement provision is being considered in order to accomodate this intent. The plan is somewhat underfunded but there would be more than enough assets left after taking out this additional amount to pay all of the other participants' benefits.

A colleague seems to remember hearing about a rule stating that an HCE cannot receive a distribution that is more than 50% of the plan's assets under certain circumstances. I'm not familiar with this - has anyone heard of this rule? I've looked through many research materials and haven't been able to find a reference. If this rule does apply, and since he would have taken distributions in two different years, would there be no problem if the plan's assets at the time of the $55,000 distribution were at least twice the sum of $55,000 plus the deemed distribution amount (I'm guessing brought up with interest to the date of the $55,000 distribution)?

While trying to find this in the regs I stumbled across Treas. Reg. 1.401(a)(4)-5(b) and Rev. Rul. 92-76 which gave me something else to worry about. If I understood them, a restricted employee (as this owner seems to be) cannot be distributed more than what he would receive as a monthly annuity for the year? There were three exceptions to this, but none of them apply in this case. I've spoken to some TPAs who've said they have HCE clients who receive varying partial lump sum distributions every year, sometimes skipping a year or two, with no systematic method. Is the Treas. Reg. and the Rev. Rul. only applicable under certain circumstances? Thanks for any advice.

A prudent discovery on your part. It appears you have read through the information and discovered this restriction would apply. As you did not discover, there is no waiver to the restriction simply because of taking "varying" amounts. When the rule is applicable (i.e. plan underfunded as described), the HCE is limited to the SLA annuity amount annually, period.

Thanks for the response. What I forgot to ask is whether a participant must always terminate employment before receiving an annual early retirement benefit (if the document doesn't address this). Would it be viewed as a type of prohibited in-service distribution if the owner kept working?

I am not sure I understand the question. Are you asking if it's prohibited because the document doesn't specifically allow for in-service distributions after NRA or are you asking if the restrictions apply because it's an in-service distribution? The answer is yes to both.

If I missed the intent, re-post.