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Hardship safe harbor vs Facts and Circumstances


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I remember someone advocating the facts and circumstances position to eliminate the hassles of the deferral suspension period. I am considering changing the 16 plans I have with hardship to F & C when I restate for EGTTRA.

I started with safe harbor provisions with prototype documents years ago and have never used F & C provisions. I have heard that the burden of proof and the employer's liability are greater with F & C. Can anyone shed any light on how much greater or how you handle it?

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I would use it in a heartbeat. The issue is that most prototype documents are not designed to allow the F&C method on the elective deferral source of funds; which is the only source of funds the hardship rules are written to restrict. Therefore, when dealing with Matching and Nonelective Contributions, F&C becomes as viable (and even more viable) than anything else.

When you are looking at F&C on the deferrals, then you are looking at an individually designed plan.

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My experience is that most employers (let's say 99.9%) do not want to be in a position, as Administrator, to determine whether one of their employees is facing a financial hardship and all that goes with it. Hardships already are very difficult to administer, and most employers do not want the additional burden of "F&C"--whether for deferrals only, or for any other $$ sources.

By the way, "F&C" on deferral hardship distributions can be part of a volume submitter plan. It doesn't have to be an individually-designed plan just to move to F&C on deferral hardships.

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My experience is like that of Larry Sieve's. Employers do not like having to make hardship determinations. That is a much heavier burden when F&C is used rather than the 6 finite categories of hardship for safe harbor. Implementing the 6 month prohibition on 401k elective deferrals is a relatively small price to pay for a safe harbor.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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The six month suspension is not related to the list of reasons. A good design for F&C will keep the list because individual determinations of adequate reason are problematic for compliance and morale. Determination of financial need can be covered by an appropriate statement of the participant. The six month suspension is the safe harbor related to finacial need. The stupidity of the six month suspension is the most compelling reason to not to adopt the financial need safe harbor and the alternative for compliance is not awful, as it is for determination of reasons.

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QDROphile - This is intriguing . . . Are you suggesting that a good so-called F&C hardship distribution design would ONLY consider the 6 safe harbor reasons to be hardships, and not make any other individual determination of hardship beyond that? So, then, if that's the case, how would F&C actually work?

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The fiduciary would have to determine that the distribution was necessary to satisfy the financial need under Tres. Reg. section 1.401(k)-1(d)(iv), but can rely on a statement of the participant described in subparagraph © with respect to the unavailability of other resources (as required under subparagraph (B)). The participant can furnish the information required by subparagraph (A), which goes with showing a need under the safe harbor list of needs. For example, to show a need to pay burial expenses, the participant would show a bill from a mortuary. The amount of the bill would demonstrate the financial need under (A). The participant would provide a statement under © with respect to the requirements of (B).

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Well, I've never seen a document utilizing F&C that limits itself ONLY to the safe harbor hardship distributions under the regs (although, of course, the document could be drafted that way in an individually-designed plan, as suggested by ERISAnut). The documents nearly always allow for other hardship distributions as determined by the administrator. As an employer, I would not want to determine whether or not a new car was an "immediate and heavy financial need", but, of course, the employee would want me to make such a decision based on this general category of hardships--and it's those kind of determinations that will drive the employer batty. Moreover, relying on the employee representation in Treas. Reg. Section 1.401(k)-1(d)(iv)© cannot occur if "the employer has actual knowledge to the contrary"--and, although there generally is not actual knowledge to the contrary, it might require denying a hardship distribution for a car if you know that the employee has a vacation home that would represent assets that could be liquidated. In any event, a 6-month suspension of deferrals is not stupidity, I think--rather, it simply is the price to be paid for utilizing deferred amounts before retirement, and is a simple way for the employer to protect itself from the additional administrative responsibilities under an F&C method. Still, I respect the opinon of the many here who suggest that F&C works well for them--although I would opt for allowing loans rather than hardship distributions.

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Sieve - having read QDROphile's posts in prior discussions, perhaps it would be helpful for you to understand that QDRO isn't so much a proponent of F&C as he is an opponent of 6-month suspension. (QDRO - hope I'm not misstating your position, feel free to correct me.)

If you go back to the original post, it's the deferral suspension that the OP was mostly referring to eliminating. The catch is that once you've gone a tiny bit out of safe-harbor, well, you're out of safe-harbor. The question becomes how far out that limb do you go.

I have to say that I'm a convert to QDRO's way of thinking. Short of doing a full F&C plan, one could take the safe harbor reasons provided by the Service but then be non-safe harbor by dumping the 6-month suspension of contributions. Personally, I'd also include other debts besides mortgages in which the threat of collections are imminent. But that's a whole separate discussion.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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You summarized very nicely, so it is with some reluctance that I embellish on a technical point. I think there are two safe harbors, one for the reason and one for the financial need. The list is the safe harbor for the reason, and the 6 month suspension is the safe harbor for the financial need Based on an old statement in the IRS manual (which I have not checked since the new 401(k) regulations) to the effect that subjective criteria for the reason are not acceptable, I find it daunting to operate under F&C for the reason unless the plan has its own list of reasons. If you have a custom list, where does it end? I find it easier just to say that we use the IRS list, end of discussion about whether or not the list should be expanded today for some new good reason. I am not so concerned about using F&C for the financial need because the IRS gives us a crutch -- the statement by the participant. Yes, it requires use of a brain for administration, and that is not what makes the administration world go around right now.

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Masteff & QDROphile -- Understood. And it does make sense to mix & match as you suggest in order to eliminate the mandatory deferral suspension (if that's your goal). As you can see from one of my earlier posts in this topic, I had never thought of this approach, and I'm learning something new (which is the whole purpose, for me, of these posts). My only hesitation from becoming a total convert is the necessary documentation--cannot use a prototype, and probably cannot use a volume submitter (without changes).

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A plan may meet the distribution-necessary-to-satisfy-financial-need requirement if there are no other currently available distributions or nontaxable loans under any plan maintained by the employer and the plan imposes the 6 month suspension on that employee making 401k elective deferrals. The safe harbor.

Or, the F&C requires (a) an employee's representation that the immediate and heavy financial need is not capable of being relieved from other resources reasonably available to the employee, and (b) the employer has no actual knowledge to the contrary or that the need cannot be relieved through (i) reimbursement or compensation (such as insurance), (ii) liquidation of the employee's assets, or (iii) ceasing elective contributions or employee contributions.

Does the knowledge of any other employee of the employer, particularly any single member of management, about the hardship applicant having a boat or vacation home that could be sold off blow the facts and circumstances test even though that other, knowledgeable employee or management member didn't even know a hardship withdrawal was applied for?

I remain unconvinced that the 6 month suspension is so onerous, either on an employee who truly has a hardship or on the employer in implementing, that it outweighs the vagaries of not knowing what is 'employer knowledge'.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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John -- I'm not convinced, either, but the notion that a plan can use this "mix & match" F&C to enable a hardship distributee to continue to salary defer is an interesting approach--risky, in some respects (after all, that's why they call the other approach a "safe" harbor), but worthy of consideration IF you want to eliminate the required 6-month deferral suspension. If eliminating the suspension is not important, then the F&C approach doesn't make a lot of sense, in my mind.

WDIK -- I'd seen some of QDROphile's prior backhanded comments--no, they're actually frontal assaults--about the rest of the world's plan drafting capabilities. I guess the rest of us are, well, just not worthy . . . How can we live with ourselves? :huh:

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  • 3 weeks later...

When I started this thread I was only thinking about starting the payroll suspension period properly. A new question came up about the end of the suspension period. If someone had signed up for 5% of pay, is the employer obligated to restart that person at 5% of pay at the end of the six month period?

If yes, what are the affects of missing the restart by a few weeks or months....or years?

Is there a way to make this the responsibility of the Participant?

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When I started this thread I was only thinking about starting the payroll suspension period properly. A new question came up about the end of the suspension period. If someone had signed up for 5% of pay, is the employer obligated to restart that person at 5% of pay at the end of the six month period?

If yes, what are the affects of missing the restart by a few weeks or months....or years?

Is there a way to make this the responsibility of the Participant?

It varies entirely by plan. Many plans deem that your election to defer was changed to zero and therefore you must make a new election after the end of the suspension. I'd say best place to start is reading the nuiances of your plan text and your hardship and deferral election forms.

I'm 95% certain there's a thread on this in the past year. Found it, close but not exact question: http://benefitslink.com/boards/index.php?showtopic=38830

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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