A participant is 55 with 10 years of service and wished to diversify. Plan allows in-service distribution as an option for diversification. Is this participant subject to the 10% penalty for early withdrawal?

The in-service "diversification" distribution is an "eligible rollover distribution" under IRC Sec. 401(a)(31). The 10% additional tax under IRC Sec. 72(t) would apply unless the employee-participant "rolls over" the distribution to an IRA or another eligible retirement plan.