Hardship Withdrawals

[Guest moorhan]

Has anyone seen a plan that allows for the continuation of deferrals to the plan after a hardship distribution has been made? I recently saw a plan document that clearly allows for the continuation of deferrals. This is contrary to what I have seen in the past. I found the following in PPC's guide to employee benefit plans.

"A participant is prohibited from making elective contributions after receiving a hardship withdrawal if the plan has adopted the "deemed necessary" rules of Reg 1.401(k)-1(d)(2)(iv)(B). If the plan has not adopted this rule, the participant may continue making elective contributions. The auditor must review the plan agreement to determine if elective contributions are allowed after hardship withdrawals. If the deemed necessary rules have not been adopted, additional responsibilities related to hardship withdrawals are placed on the plan administrator, such as determining if the participant has other resources available before approving the hardship withdrawal."

The plan document clearly allows the continuation of deferrals. It seems that the IRS would not have issued a determination letter if this was not allowed. Any thoughts?

[R. Butler]

Your analysis seems correct. A 12 month cessation of deferrals is required if the plan is relying on the safe harbor test. If the plan document uses the facts and circumstances test I don't know of anything in the regs that require a participant to quit deferring. See 1.401(k)-1(d)(2)(iii)(B).

[MWeddell]

That's right, the 12-month suspension (soon to be only a 6-month suspension) applies only if one is using the same harbor resources test, not if one uses the general resources test. You might want to compare Treas. Reg. 1.401(k)-1(d)(2)(iii)(B) with 1.401(k)-1(d)(2)(iv)(B).

Getting a determination letter on a plan document that uses the general resources test is not a problem. Administratively, it requires greater care unless the plan document also uses an optional rule to relay on the employee's written representation unless the employer has actual knowledge to the contrary.