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acceleration of distribution timing

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We have a number of plans that use "End of Plan Year" for F.3. Time of Payment (other than Death) - but want to waive that waiting period in cases of hardship.  We propose to use 3.d. to write in the language from b.(End of Plan Year) followed by "Acceleration of timing allowed for cases of Hardship (per safe harbor rules)."

My question is - in order to use Hardship as a criteria for allowing acceleration of distributions for terminated participants - must the plan allow Hardships as an in-service distribution option?  It was my interpretation that this section of the Basic Plan Document (Timing & Form of Payment -  Section 7.02, Article 7) is separate from Article 8 (In-Service Distributions and Loans).
(FTWilliam declined to answer)

Appreciate hearing others' experience. Thank you

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I assume it is a volume submitter document?  You are really "just" making a change to a VS document and should specify all of the conditions that you are changing.  You could reference "the safe harbor rules for hardships found in ..." and it might be ok. 

But I don't think it's a good idea...in fact I think it is a bad idea.  In an effort to be nice, you're hanging your butt out there hoping the IRS would say it's ok.  In fact I don't think it is ok to have contingencies like that, but I'm not sure.  In any event, as a practical matter, everyone is going to try to claim a hardship and you're just going to deal with saying "no" to that instead of saying "no - and here it is in the plan, sorry but that's the way it is."

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The language you reference does not apply to Hardships.  That language is for service termination benefits other than death.  A Hardship Distribution is not a service termination distribution and is governed by other text.  The changes you want to make are totally unnecessary.

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The prior commentators make good points.

 

FYI, the 401(k) hardship rules are not limited (by law) to only in-service distributions. So, if a 401(k) plan document’s hardship provision is not limited to just in-service distributions, then a participant who has met the requirements for a hardship distribution would be entitled to a post-termination hardship distribution (of just the hardship amount) at any time before being entitled to receive the plan’s termination-of-employment benefits (imagine, for example, a plan that pays out only upon termination only upon attainment of NRA).

 

For plans with immediate cash-outs upon termination, the question theoretically should not arise, but it sometimes does, depending on the plan design. Imagine that the plan provides only for lump sums upon termination, the amount payable upon termination exceeds the involuntary cash-out threshold (i.e., participant consent required), and the participant doesn’t want to take out all the money, so they ask for a hardship distribution. If the hardship is genuine (relative to the plan’s provisions) and the plan does not limit hardships to only distributions prior to termination, then the hardship amount should be paid post-termination.

 

The reason most people think that hardship distributions are only for in-service distributions is because hardship is (probably) the most significant exception to the rule against in-service distributions of deferrals prior to age 59 ½. So, in most administers’ experience, hardship distributions tend to be in-service distributions, especially when plans pay out all benefits upon termination soon after termination, and especially when the plan is a 401(k) plan (i.e., the failure to have attained age 59 ½ is pertinent). But a document provider is certainly free to provide documents that limit hardships to only those hardships occurring prior to termination (or documents that contain an option in that regard).

 

The 401(k) hardship rules apply only to the 401(k) component of the plan, but as a practical matter, many plan documents contain the same hardship rules for the non-401(k) accounts as for the 401(k) accounts. But not necessarily. Profit sharing funds may be distributed on account of a stated event, and one of those stated events can be hardship using some other definition of hardship. (Just saying.)

 

So, regardless of the document provider, a close examination of the plan document is required before you know when hardship distributions can be paid and whether it makes sense to do so (you would generally not want to do so if the funds can be paid out at the same time for some other reason, such as when such funds can be paid either under the plan's in-service distribution provisions or under the employment-termination provisions).

 

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17 hours ago, Below Ground said:

The changes you want to make are totally unnecessary.

But I think the point was they didn't want hardships for everybody, just terminees.  And there could be source restrictions.

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Bird, I did not see that the OP was about having Hardships for terminations only.  After a careful reread, I see how that could a primary focus of the post.  Especially after looking carefully at the 2nd paragraph, I see that I definitely overlooked that aspect of the post.  Coincidentally, I just had a rather detailed email exchange with Ft. Williams about whether a terminated participant can get a Hardship.  I was given an explanation I do not agree with, that basically said that since a terminated participant is not Eligible Employees, and to get a Hardship you must be an Eligible Employee, you must be in service to get a Hardship.  (At one point we were debating whether a terminated person with a balance is even a Participant. Yes, in my opinion. No according to the person with whom I was discussing the issue.)  Personally I found the logic for the explanation provided to me to be convoluted at best.  The last comment to me was that they are already looking at how to clarify the term Participant.  BTW, despite my disagreement on this topic, I find Ft. Williams to provide a superior product and service.  Even including this current disagreement, they have never let me down, and I am a very satisfied customer.

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1 hour ago, Below Ground said:

I was given an explanation I do not agree with, that basically said that since a terminated participant is not Eligible Employees, and to get a Hardship you must be an Eligible Employee, you must be in service to get a Hardship.  (At one point we were debating whether a terminated person with a balance is even a Participant. Yes, in my opinion. No according to the person with whom I was discussing the issue.)  Personally I found the logic for the explanation provided to me to be convoluted at best.  The last comment to me was that they are already looking at how to clarify the term Participant.  BTW, despite my disagreement on this topic, I find Ft. Williams to provide a superior product and service.  Even including this current disagreement, they have never let me down, and I am a very satisfied customer.

I looked at the hardship section earlier and saw "Participant" and thought that's what it meant (not "Employee.")  Thanks for mentioning this.  And I agree, it is an excellent product and a superior value and they provide exceptional service.

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