In looking for assets to help fund an established life insurance need or other financial goal, you may find prospects among the employees of a small-sized business. If they are still employed and over age 59 1/2 (to avoid tax penalties), they may have a profit-sharing plan that is eligible for an "in-service distribution."
As a result, taking an "in-service withdrawal" may be just the ticket to help a client find those premium dollars you thought were lacking.
How in-service withdrawals work
In-service withdrawals are permitted because, unlike defined benefit and other pension plans that must provide for retirement benefits, profit-sharing plans (which include 401(k) plans) are not so limited. Profit-sharing plans can permit a distribution of all or part of a participant's vested interest that has remained in the plan for at least two years prior to the distribution. 
The plans may also allow a participant with at least 5 years of plan participation to withdraw all or part of the participant's vested interest, including amounts contributed within the last 2 years. In-service withdrawals can also be used for the purchase of incidental life, accident, or health insurance.
So, provided the plan permits distributions while the participant is still actively working and participating in the plan by virtue of the 2-year ("aged money") or the 5 years of plan participation rule, in-service withdrawals are permitted.
In-service withdrawals can be done under various conditions, such as after a fixed number of years (at least two years as noted above); the attainment of a stated age; or upon the prior occurrence of some event such as a layoff, illness, disability, retirement, death, or severance of employment.
Remember, the profit-sharing plan document must specifically allow for such distributions. Many profit sharing plans allow for in-service withdrawals if elected in the agreement adopting the plan.
Such withdrawals can't be made from amounts attributable to elective pre-tax contributions (including deferrals plus earnings, qualified non-elective, and matching contributions) from Internal Revenue Code (IRC) 401(k) profit-sharing plans prior to age 59 1/2 , except for hardship withdrawals and disability. However, hardships are generally limited to the employee's pre-tax elective deferrals, less any prior hardship distributions, except for pre-12/31/88 gains if the plan provides for them. Also, hardship withdrawals cannot be rolled over into IRAs. In-service withdrawals can still be taken from other non-401(k) employer profit sharing contributions that are allowed in the plan.
