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NQDC hardship withdrawal


Guest dhoetger

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Guest dhoetger

We have a NQDC plan for highly compensated employees and an employee has asked for a hardship distribution (which our plan allows) to purchase a second residence. He has stated that he has no other avenue for obtaining the money needed to buy the house. First, is there any IRS guidance relating to the issue of hardship distributions from NQDC plans (besides the section 457 regulations)? Second, if we make the distribution and the IRS later determines that it should not have been made, what are the possible consequences (e.g., will all plan participants be considered to be in "constructive receipt?")? Thanks!

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Guest Mark_Gilje

I see two issues here.

1. What does your plan document say about the definition of a hardship? In general, the requirements for hardship withdrawals need to be more stringent than for qualified plans. Under most definitions that we have seen, a request for a second home would NOT meet the requirements. Frequently, the terms "unanticipated" and "severe" are used when describing the hardship.

2. In general, improper administration of one individual can result in the entire plan being "blown up", resulting in immediate taxation of all participants on the deferred amounts.

I suggest getting an opinion from your inside or outside counsel on both issues.

Best of luck!

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Guest wmacdonald

I agree with Mark's comments, I don't think a second home would be a hardship. If your plan has a "haircut provision", you may suggest the executive pull money out this way and pay the penalty (usually 10% of account balance).

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