Guest sodbuster Posted February 22, 2001 Share Posted February 22, 2001 If a 401(k) plan allows its participants to take a distribution from employer sources (i.e. profit sharing and/or regular match) "on account of hardship", is there a minimum amount of time that the employer money must be in the plan before it may be withdrawn? If so, does it apply to all pre-retirement/pre-separation withdrawals from employer sources (i.e. inservice and on account of hardship)? Where is this referenced in the Code/regs? Link to comment Share on other sites More sharing options...
Bill Berke Posted February 22, 2001 Share Posted February 22, 2001 The governing regulations are Reg. 1.401(k)-1(d)(2) et.seg. And you cannot withdraw employer contributions under 401(k) hardship rules. The amount is limited, basically, to employee deferrals. You could permit employer contributions and earnings to be withdrawn from a profit sharing plan under the aged money regulations - but these are not 401(k) rules. Link to comment Share on other sites More sharing options...
Guest mo again Posted February 22, 2001 Share Posted February 22, 2001 The rules governing non-401(k) in-service distributions from a profit sharing plan are contained in 1.401-1(B)(1)(ii). More on "aged money" in Rev. Rul. 71-295. Link to comment Share on other sites More sharing options...
QDROphile Posted February 23, 2001 Share Posted February 23, 2001 You may allow hardship withdrawals of employer funded amounts on the basis that hardship is an "event" defined in the plan. This position is a bit on the edge, so it is best to get your determination letter on plan provisions that describe the withdrawals. We have not encountered IRS resistance to such provisions. Link to comment Share on other sites More sharing options...
Guest AFRICA6796 Posted February 23, 2001 Share Posted February 23, 2001 The current plan document should state the circumstances under which hardship distributions can be taken and alos from which source. I disagree that hardship distributions cannot be taken from employer contribution. The distinction is that hardship distributions that are taken from employee deferrals cannot be rolled over Link to comment Share on other sites More sharing options...
Guest sodbuster Posted February 23, 2001 Share Posted February 23, 2001 Thanks for the messages posted on BenefitsLink. I agree with the last response from "Africa" that a plan document may allow for withdrawals upon certain events. I guess my reference to a "401(K) Plan" misled the first couple of responses on the message board. I am wondering if anyone has any guidance to my original (and maybe poorly written) question. ASSUMING a plan allows for withdrawals from a MATCH source and ASSUMING that the plan provided that "on account of hardship" was one event that could entitle one to such a withdrawal, is there a minimum amount of time those funds must be in the plan before it is withdrawn? In other words, if a participant has legitimate hardship circumstances, can he only withdraw match funds that has been in there longer than the minimum amount of time? For some reason, 2 years seems to be stuck in my head. Thanks for your help. Link to comment Share on other sites More sharing options...
Guest mo again Posted February 23, 2001 Share Posted February 23, 2001 The two years is from Rev. Rul. 71-295. Check Rev. Rul. 71-224 for information about hardship withdrawals from profit sharing plans. Although these rulings are old, they still set the standard for in-service profit sharing distributions. Link to comment Share on other sites More sharing options...
Bill Berke Posted February 23, 2001 Share Posted February 23, 2001 I disagree with AFRICA6796. Treas Reg 1.401(k)-1(d)(2)(ii) explicitly defines a hardship "distributable amount" as the amount which "is equal to the employee's total elective contributions as of the date of the distribution", reduced by previous distributions... Some amount of elective contribution earnings are allowed to be included in the distribution subject to additional limitations in those final regulations. As QUADROphile said, if there is explicit language in the document, and you and your client understand the risks, you could try to include employer elective contributions. But, I suspect, if this plan gets competently auditted the IRS, the agent may demand a prospective amendment deleting the paragraph. I guess that QUADROphile's success is a result of imperfect document reviews by IRS examiners. But the IRS would have to honor actions prior to the audit which are based upon plan language with a valid FDL. And to answer your final question, there are no time limitations on the amounts permitted to be withdrawn under the 401(k) hardship rules. The timing rules apply to profit-sharing plans - as discussed by others Link to comment Share on other sites More sharing options...
Guest mo again Posted February 23, 2001 Share Posted February 23, 2001 OK, what the heck - I disagree with Bill. The only money-types that are subject to the 401(k) withdrawal restrictions are deferrals, QMACS and QNECS. I checked The ERISA Outline Book to be sure, and Sal agrees, so if I'm wrong I'm in good company. Link to comment Share on other sites More sharing options...
Bill Berke Posted February 23, 2001 Share Posted February 23, 2001 Mo Again - I agree with you that the 401(k) distribution restrictions apply only to deferrals, QMACs and QNECS. I thought the question was what can I withdraw under the hardship rules? And that is where I think you are restricted to deferrals. So what am I missing? Link to comment Share on other sites More sharing options...
Guest mo again Posted February 23, 2001 Share Posted February 23, 2001 Or maybe I am missing something. I gathered from the two posts by sodbuster that what we have is a 401(k) plan with a profit sharing component, and that the question pertains to the profit sharing component. sodbuster, are we on the right track? Link to comment Share on other sites More sharing options...
Richard Anderson Posted February 23, 2001 Share Posted February 23, 2001 sodbuster, No one yet has answered your question, so I'll tell you what I think. 1.401-1(B)(1)(ii) lists the events that will allow a distribution from a profit sharing plan. They are: 1. After a fixed number of years; 2. After attainment of a stated age; or 3. Upon the occurrence of some event, such as layoff, illnes, disability, retirement, death, or termination of employment. In order to allow for distributions only one of the above three conditions must be met; you don't have to meet all three. Hardship distributions fit the number three condition; it is the occurence of an event. I don't believe that the money has to be in the plan for any period of time to be eligible for hardship distribution. Link to comment Share on other sites More sharing options...
Guest sodbuster Posted February 23, 2001 Share Posted February 23, 2001 Actually, I was wondering about a distribution from discretionary MATCH funds in a 401(k)plan. It seems as though Rev. Rul.'s 71-295 and 71-224 deal specifically with profit sharing. (FYI: 71-224 says that distributions in the case of a hardship are not subject to the 2 year limitation if the rules for withdrawal are clearly stated in the plan and uniformly applied). And §1.401(k)-1(d) et. seq. retrictions apply on to deferrals, QMACs and QNEC's. So what about a non-qualified discretionary match? Link to comment Share on other sites More sharing options...
Guest mo again Posted February 23, 2001 Share Posted February 23, 2001 If not a QMAC, the 401(k) withdrawal rules do not govern, and the revenue rulings would apply. The matter becomes one of avoiding constructive receipt by imposing conditions, which is what the revenue rulings discuss. Link to comment Share on other sites More sharing options...
Richard Anderson Posted February 23, 2001 Share Posted February 23, 2001 I treat match accounts the same as profit sharing for hardship purposes. If there is no time period necessary for a 401(k) hardship or a profit sharing hardship, why would you think that there would be for a match? Link to comment Share on other sites More sharing options...
Guest mo again Posted February 23, 2001 Share Posted February 23, 2001 Richard, if you are responding to me, did I somehow imply that I thought that both aging and hardship were required? If so, I never meant to. Link to comment Share on other sites More sharing options...
Guest boberlander Posted February 23, 2001 Share Posted February 23, 2001 With regard to Bill Berke's statement about Employer Contributions being allowed because of imperfect document reviews - the basic plan document that applies to our prototype allows Employer related contributions to be withdrawn upon hardship. As we are not the only company using this plan document, and we file our nonstandard plans, that's a lot of imperfect IRS reviews. Perhaps too many to be accidental. Link to comment Share on other sites More sharing options...
Richard Anderson Posted February 23, 2001 Share Posted February 23, 2001 mo again, I was responding to sodbuster. Link to comment Share on other sites More sharing options...
Guest sodbuster Posted February 23, 2001 Share Posted February 23, 2001 Richard, I guess there is no reason to think match wouldn't be the same as profit sharing. The fact that deferrals have no time restriction doesn't mean much since that is employee money. Since hardships from profit sharing are not subject to the two year limitation, I guess the same rules would apply to match. It would be nice to see that in the regs or from the Service though. Link to comment Share on other sites More sharing options...
Bill Berke Posted February 23, 2001 Share Posted February 23, 2001 to Richard Anderson. I believe that there is no time rule regarding hardship distributions from a 401(k) account. But the amount of distribution is limited to the employee's deferrals. I further believe that the 401(k) hardship rules do not apply to any profit sharing plan account. One of the few ways to get a distribution (while employed) from a profit sharing plan is to use the aged money rule. Then there are no restictions on the amount of money - except that deferrals, QNECs and QMACs do not come under the aged money rules because of the 401(k) distribution rules. I do not believe that a hardship distribution can come from a QNEC or QMAC and I further believe that the aged money rule does not apply to these accounts. A profit sharing could have a limitation on the aged money amount based an individual internal plan rule. The reg's only go to aging. If I am missing something, please let me know, I sure don't know everything. Thanks. Link to comment Share on other sites More sharing options...
Guest sodbuster Posted February 23, 2001 Share Posted February 23, 2001 Bill, For profit sharing only, Rev. Rul. 71-224 says that the aged money rule does not apply when there an occurrence of a certain event, and one of those events can be a bona-fide hardship. Link to comment Share on other sites More sharing options...
QDROphile Posted February 23, 2001 Share Posted February 23, 2001 Hardship withdrawals are available from amounts other than elective deferrals becuase they fit the rules applicable to distributions from profit sharing plans. They don't depend on the 401(k) rules. The rules for profit sharing plans allow in-service distributions of aged money, upon attaining a specified age, or the occurrence of a specified event. The hardship is the specified event. 401(k) only deals with elective deferrals. It does not establish rules for qualified plans generally. We have the provision in our volume submitter plans, which get detailed review by experienced IRS reviewers. The "on the edge" statement reflects the fact that there is no guidance about events that can be the basis for in-service withdrawals. By contrast, we have guidance about aging money. Link to comment Share on other sites More sharing options...
KJohnson Posted February 23, 2001 Share Posted February 23, 2001 I am with QDROphile. I believe that you can clearly have hardship distributions from both profit sharing and match accounts. I think the only thing that is "on edge" is the definition of hardship for these distribuitons. I always thought that you really ran no risk if you mirrored the safe harbor 401(k) hardship events for profit sharing and match hardship distributions. However, if you want to get more "daring" on what constitutes a hardship (e.g. uninsured casualty loss) then simply put the provisions in you plan, submit them to the IRS and flag them in your cover letter. Link to comment Share on other sites More sharing options...
KJohnson Posted February 23, 2001 Share Posted February 23, 2001 I agree that the 401(k) rules clearly only apply to hardship distributions for elective deferral accounts. My point was that you have no real guidance of what would constitute a hardship for purposess of profit sharing and match accounts. Without such guidance, I think you could always feel comfortable in adopting in your plan the 401(k) hardship events as events which also allow for distribuitons from the profit sharing and match portions of the Plan (This also provides some simplicity in administration because there is only one set of hardship "events" for all of a Paricpant's accounts in the plan.) That said, I have seen prototypes where an employer can choose to 1)apply the safe harbor 401(k) definition of hardshp to such distributions 2)choose a broader but specific definition contained in the prototype document which often includes things such as funeral expenses for a family member, uninsured casualty losses etc. or 3) submit a separate addendum where the employer crafts its own definition of hardship. Where I have always felt uncomfortable, however, is with language such as "an event which the Plan Administrator determines to be a hardship". If the employer wants such an option, I have encouraged them to add the five years of participation or two year seasoned money rule as an additional condition to the distribution in the event that the IRS disagrees with the Plan Administrator on what constitutes a hardship. Link to comment Share on other sites More sharing options...
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