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lkpittman

401(k) Hardship Provisions

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We have a client that has set up a 401(a) plan to receive matching contributions(410(m)) (they match elective deferrals under a separate 403(B) plan). They have drafted the plan to allow "hardship" distributions, using the 401(k) rules for allowing such hardship distributions. The plan does not contain 401(k) provisions, however. The plan also specifically precludes any "pre-retirement distributions". This seems weird to me--but I suppose it's okay to utilize the 401(k) rules relating to hardship distributions for deferral amounts and apply them to 401(m) amounts? They don't need to put such stringent restrictions on the 401(m) amounts, for pre-retirement distributions, but I don't see anything wrong with it? Any thoughts?

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The 401(k) and 401(m) regulations state that qualified matching contributions (QMACs) may not be withdrawn upon an employee's financial hardship. (QMACs are matching contributions that are immediately vested and subject to 401(k) distribution restrictions and hence could be shifted to the ADP test.) That probably doesn't apply to you because you're matching 403(B) deferrals so there's no need to design the match in a way that potentially could help the ADP test. For other types of matching contributions, the regulations don't say whether matching contributions may have a hardship withdrawal feature.

Most observers feel that hardship withdrawals of matching contributions is allowed because of Revenue Ruling 71-224. Matching contributions are a type of employer contribution to a profit-sharing plan, so that Rev. Ruling should still apply. Seems odd that we're still using a 1971 Rev. Ruling to justify the answer, but that's the situation.

Treas. Reg. 1.411(d)-4 requires that the plan document set forth objective criteria for hardship withdrawals, so the plan has to give some details. Most plans that have this feature just borrow the hardship withdrawal language from the 401(k) regulations (choosing between general and safe harbor tests as desired) figuring that even though those standards were drafted for elective deferrals, they'll just use them for 401(m) matching contributions as well.

This also makes sense in your situation. Most 403(B) providers, relying on some legislative history, apply the 401(k) hardship withdrawal criteria to 403(B) deferrals. (This should be in your written 403(B) plan document that's required by ERISA.) Hence, it'll be easier to communicate and administer your plans if the same hardship withdrawal standards apply to both 403(B) elective deferrals and 401(m) matching contributions.

Good luck!

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Thank you--this was just the sort of information I was looking for. You are right, the match is not a QMAC. I knew it was probably okay, but wanted something to go on!

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