In-Service, Out of Sorts: Talking to Plan Sponsors About Withdrawals From Their DB Plans

Every RPC has heard it. Usually right after a great investment year or a conversation with a CPA who’s “heard it’s allowed.”

“It’s my company’s money. Why can’t I take some out?”

It sounds simple. It’s not. Defined benefit and cash balance plans aren’t high-interest yielding piggy banks (that WOULD be cool). They’re regulated, formula-driven benefit structures bound by IRC 415 limits, multiple annuity start dates, and layers of compliance that make “just taking money out” a dangerous oversimplification.

You can’t take an in-service distribution from a defined benefit plan before age 59½. Period.

And when you do take one, it’s not “a withdrawal”, it’s an in-service distribution that changes the math on everything else: your 415 limit, your final payout at plan termination, and the structure of any future plan you start.

Every dollar that comes out now reduces what’s available later.

What’s Really Going On Behind the Curtain in a DB plan

In defined benefit and cash balance plans, benefits are calculated using a monthly annuity formula under IRC Section 415. When someone takes an in-service distribution, that payout must be converted into an equivalent monthly benefit. That new number offsets the participant’s lifetime 415 limit.

Translation: Every time a plan sponsor pulls money early, they’re trading long-term benefit potential for short-term liquidity, and possibly creating multiple annuity starting dates (MASDs). Each of those must meet the 415 test separately.

If you’re not tracking those offsets correctly, you’re setting the stage for compliance chaos when the plan terminates.

The “Old Plan / New Plan” Trap

Here’s where it gets tricky: A sponsor terminates their old defined benefit plan, takes distributions, and wants to start fresh with a new cash balance plan.

They expect a clean slate. But Section 415 doesn’t forget. Those prior lump sums need to be converted into monthly annuities and offset against the new plan’s limits.

If that math says there’s no room left under 415, the sponsor may not be able to accrue new benefits, no matter how much they want to.

The “Excess Assets” Myth

Another common misunderstanding: “We’re overfunded, so let’s just take some money out.”

That’s not a solution, that’s an expensive mistake. Distributions don’t erase excess assets, they reduce both assets and liabilities almost equally. Worse, if it’s a traditional DB plan using 417(e) interest rates, taking distributions can actually block the plan from shrinking its excess asset problem through normal interest rate changes.

And if you do revert excess assets to the company? Say hello to a 50% excise tax, plus corporate and shareholder taxes.

Divorce, QDROs, and the Illusion of “Replacement”

This one gets personal. An owner in a divorce sees part of their benefit go to an ex-spouse through a QDRO. Once that distribution is made, they think, “No problem, I’ll just replace it.”

Don’t.

That “replacement” would likely overfund the plan and create excess assets. Once a QDRO payout happens, it counts against the owner’s 415 limit, no do-overs, no make-ups.

The Role of the RPC: Tell the Truth, Even When It’s Unpopular

These moments separate the pros from the paper-pushers. When a plan sponsor wants to tap plan assets, your job isn’t to “find a way.” It’s to educate, translate, and protect the structure that makes the plan work.

Be the outlaw who says no, backed by knowledge, not fear. The one who can explain IRC 415 in plain English and still keep the client’s trust.

Because clarity builds credibility. And credibility keeps your firm, and the whole retirement plan ecosystem, strong.

In-service distributions aren’t evil. They’re just misunderstood.

Handled correctly, they can fit into a long-term plan strategy. Handled poorly, they create compliance nightmares and shrink retirement benefits.

So the next time a sponsor says, “It’s my money,” you can smile and say: “It is, but the IRS wrote the rulebook.”