Keeping Your 401(k) Distribution Safe & Sound

A Participant requests a distribution, is there an alternative to mailing a paper check?

Yes! Taking a distribution or loan from a 401(k) account can seem to take a lot of time, but did you know an ACH or direct deposit of those funds to a checking or savings account is an option? 

• ACH/ Automatic Clearing House: a secure, nationwide electronic funds transfer network that allows credit and debit entries to personal bank accounts by all U.S. financial institutions. It is an alternative to a written check.
• Direct Deposit: The deposit of electronic funds directly into a bank account as a form of payment rather than a paper check.

An ACH or Direct Deposit of distribution or loan proceeds is reliable and often the quickest delivery option for a 401(k) distribution or loan. 

If a participant does not have a personal checking or savings account it is recommended that he/she sign up for one if planning a distribution of a 401(k) account and want ACH or direct deposit as the delivery method.  If a participant does not have a checking or savings account, a paper check will be the default delivery option.

ACH or Direct Deposit is only allowable into an account that is owned by the Participant!

A general rule every plan sponsor and participant should know - interest in a 401(k) account, including the “vested interest,” may not be alienated. This means that the account interest may not be sold, used as collateral for a loan (other than for a plan loan to the participant), given away or otherwise transferred (except at death to a beneficiary).

Why: The 401(k) plan has to distribute the balance to the participant, so that he/she can be properly taxed on a distribution and the 401(k) plan does not violate the anti-alienation rules. 

Fine Print:
(G) Assignment or Alienation. Except as provided in Code §414(p) relating to QDROs (or a domestic relations order entered into before January 1, 1985) and in Code 401(a) (13) relating to certain voluntary, revocable assignments, judgments and settlements, neither a Participant nor a Beneficiary may anticipate, assign or alienate (either at law or in equity) any benefit provided under the Plan, and the Trustee will not recognize any such anticipation, assignment or alienation. Except as provided by Code §401(a) (13), a benefit under the Plan is not subject to attachment, garnishment, levy, execution or other legal or equitable process.

The participant will need to provide a voided check copy or other proof of ownership to the account your funds are to be electronically transferred to.

Why:  The owner of an account- (if NOT the participant) - has no rights to the money at the time of distribution, so the plan cannot distribute to him/her, even if, the participant wants to transfer the funds to him/her.

I hope this has been informative - explaining why proof of ownership and depositing funds into YOUR checking or savings account is so important!

The Author: Amy Newman

Lead Transaction Support Associate
abgncs.com

anewman@abg-mn.com