Certified Plan Sponsor Professional (CPSP) Practice Exam

What is a permissible in-service distribution of employee deferrals from a 401(k) plan?

1. Early retirement

2. Hardship

3. Termination of employment

4. Inactivity

The correct answer is: Hardship

A permissible in-service distribution allows employees to withdraw funds from their 401(k) plan while still employed under certain conditions. Hardship distributions are one such condition, specifically outlined in IRS regulations, allowing employees to access their deferrals in times of immediate and pressing financial need, such as medical expenses, education costs, or to prevent foreclosure on their primary residence. In-service distributions are intended to provide relief to employees while maintaining the tax advantages of the account. Other options, such as early retirement and termination of employment, generally refer to situations allowing for distributions, but they fall outside the specific context of in-service distributions. Inactivity does not qualify as a condition for permissible distributions, as it doesn’t necessarily align with the IRS guidelines for accessing funds while still employed. Thus, hardship is the most appropriate choice here because it specifically addresses the criteria under which employees may take funds from their 401(k) plans while still active in their jobs.