TheRestatement3dOfTed

Yes, this occurred a number of years ago, but the r/k has just now brought it to our attention.

401(k) participant whose account included after-tax and pre-tax dollars received an otherwise-proper hardship distribution (i.e., authorized by plan, procedures followed, right amount was paid, etc.), but which was paid entirely out of pre-tax deferrals (i.e., the distribution was paid without regard to the ordering rule requiring it to have been paid first out of after-tax dollars). To pluck some numbers out of thin air, let's say that a $10,000 hardship distribution was paid entirely out of pre-tax dollars, rather than $1,000 after-tax (representing the full after-tax account balance) and $9,000 pre-tax. As a result, the administrator treated the entire $10,000 distribution as taxable and subject to the 10% early withdrawal penalty. But if the first $1,000 had properly come out of the after-tax account, the amount of P's basis in the after-tax account shouldn't have been reduced. So the plan isn't out any money, but the tax hit to the participant was a bit larger than it should have been. To me, it seems reasonable under the general correction principles to fix this by cutting P a check for the amount of the improper tax hit (plus interest), and moving the remaining after-tax dollars into P's pre-tax account. But EPCRS doesn't seem to directly address this scenario. Anyone encountered this before? Thoughts? E: I suppose one might argue that this is, really, a failure to have initially required P to withdraw the after-tax amounts before receiving the hardship, which could be corrected by requiring repayment of the portion that shouldn't have been distributed in the first place. But from the plan's perspective, the right amount (in absolute terms, anyway) was paid out. Any repayment would presumably be made with after-tax money anyway, so requiring that additional steps seems like an overly complex means of reaching the same result you'd get by recharacterizing the remaining after-tax dollars already in the plan as pre-tax...

Might want to check out the exceptions for GHPs offering only "excepted benefits," including limited-scope dental/vision plans that are distinct from group health plans offering non-excepted benefits. ERISA §732© (i.e., that §§701-734 don't apply to GHPs that offer only HIPAA excepted benefits; Michelle's Law is found at ERISA §714, IIRC). Cheers.

In August 2009, the IRS issued Rev. Rul. 2009-31, which addresses contributions of the dollar value of unused time off to profit-sharing and 401(k) plans. From the EBIA weekly newsletter, 09/10/2009: "This guidance illustrates two situations in which the dollar equivalent of unused paid time off (PTO) can be contributed to an employer's profit-sharing plan without adversely affecting the plan's qualified status. In one scenario, the plan required the value of unused PTO, up to applicable Code Section 415 limits, to be contributed as of December 31 (i.e., a nonelective contribution), with any remainder being paid to the employee in cash the following year. In the second scenario, participants could elect to have all or a portion of the value of unused PTO (up to applicable Code Section 415 and 401(a)(30) limits) contributed to the plan in the following year (i.e., an elective contribution), with the remainder paid in cash. In both scenarios, IRS concluded that PTO contributions that were made as described and satisfied the applicable nondiscrimination requirements would not be included in an employee's income until distributed. Any amounts paid in cash instead of being contributed would be income in the year paid." A companion ruling, Rev. Rul. 2009-32, addresses amendments involving mandatory or elective contributions of unused time off to profit-sharing plans upon termination of employment. Rev. Rul. 2009-31 available at: http://www.irs.gov/pub/irs-drop/rr-09-31.pdf Rev. Rul. 2009-32 available at: http://www.irs.gov/pub/irs-drop/rr-09-32.pdf Cheers! (E: edited for correct links)