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Mr Bagwell

Roth Hardship and Taxes, Relius Transaction

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Relius Users,

We recently processed a hardship for an employee.  The employee wanted to use the available Roth basis as the amount for the hardship.  No problem on the processing of the transaction. 

The slight trouble comes in with taxation.  The Roth dollars have been in the plan for 5 years, but the employee is not 59 1/2, so the distribution is not Qualified, so taxes would be applicable.  With that, my understanding is that there is a proration between the basis and the total value of Roth.  In this instance, let's say basis is 75% of total value.  So we did a manual calculation of taxes for the 1099. 

I really expected the transaction to give a taxable amount calculation because a "regular" cash distribution will calculate the taxes on the Roth piece if the distribution is not qualified.  So I called Relius and put in an incident to see what they say.  Relius says the "Hardship distribution template is set to use Contributions Only, which will not include earnings".  Makes sense, but not for a Roth Hardship that isn't qualified.

Am I missing something?  Did we do something wrong in regards to the taxation?

In regards to the Roth recovered basis.  The transaction used the full amount of the basis, which I would expect, it's just weird because you don't expect taxes on the basis, but then again the distribution wasn't qualified.

Let me know your questions or thoughts.

Thanks

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I think your intuition, Mr. Bagwell, that a portion should have been taxable is correct and that (if I understand your correction correctly ) they seem to be confusing the amount that is distributable with the source of the distribution. See Treas. reg. 1.402A1, Q&A-8.

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