Negative Earnings Affect Hardship Withdrawal Limit?

[Guest FREE401k]

Hypothetical Situation: A 401(k) participant has contributed $1000 to the Plan in the year since he was hired. The company contributed a match of $500. The participant has a qualifying financial hardship. The hardship regs say he can only withdraw the money he has contributed; he cannot withdraw earnings on that money. But what if his earnings were negative? For example, what if his $1000 is now worth $900? Can he withdraw the $1000 or can he only withdraw $900?

[Guest Jim Kais]

I think you need to check your plan document first. Many documents allow hardships withdrawals to either be prorated across all money types/sources or based on a preset distribution hierarchy. Some stipulate that H/S withdrawals may only come from the employee deferral source. In your case, if the withdrawal hierarchy is limited to the employee deferral source only, the participant is only getting $900. If the plan allows for the proceeds to come from multiple money/types or sources, they should be able to get $1000 since that is the max available. Generally, recordkeeping systems track hardship available amounts based on life to date employee pretax contributions only.

[Guest FREE401k]

Jim: Thanks for the response. One question for my future reference: when you say that some plans allow hardship withdrawals to be prorated across "all money types/sources or based on a preset distribution hierarchy" I want to double-check that you truly mean all sources, including ER match? Others in my firm have opined that your statement is true, but would only apply to match and/or investment income money that was "grandfathered" in prior to the law change (back in 1986?), or to other sources of money like a rollover from a prior Plan. They say that "plain ole" ER match and investment income cannot be included.

Using my hypothetical example, the participant has $1000 EE con, ($100) investment income, and $500 ER match for a total account balance of $1400. If he has a $1000 qualifying hardship, and the Plan document permits, could he withdraw $1000, which would be made up of $900 from his EE account and $100 from his ER account?

Details, details! Thank you.

[Guest Jim Kais]

I see nothing in the IRS preambles or other pubs. that would suggest anything to the contrary. I still believe that if your plan provides for a distribution hierarchy that includes employer money types or sources, you can disperse the proper H/S amount (as illustrated in your example).

Again, in your particular example, it appears as if you calculate the maximum hardship available amount correctly ($1000). Even though the employee deferral account is made up of $100 in earnings and $900 basis, your max available does not change. (unless a prior hardship withdrawal was processed). I still believe that you could tap the ER match vested portion (or rollover account) to accumulate the additional proceeds to cover the $1000 H/S W/D. This should be outlined in the plan doc.

If your colleagues can site some regs or other documentation from TRA86 that suggests something to the contrary - I'm all about education. I do not recall many plans haveing a "pre-86" match bucket for the purposes of monitoring hardship withdrawals. Fill me in.

Not a lot more, but I basically stand by my original comment.

JMK

[Guest FREE401k]

Jim: Here is the cite for limiting hardship distributions to EE cons only - see the last sentence:

"CCH-EXP, PENSION-PLAN-GUIDE, ¶7660, Hardship Distributions

Hardship withdrawals from a Code Sec. 401(k) plan are permitted if: 1. the participant has an immediate and heavy financial need (see ¶7665 ), and 2. the distribution is necessary to satisfy the participant's financial need (see ¶7670 ) (.05).

The plan must set forth nondiscriminatory and objective standards for determining whether the specified need is present and the amount necessary to satisfy that need (.10).

¨ The amount of the hardship distribution is generally limited to the amount of the employee's elective deferrals and does not include earnings. See ¶7670."

Do you have a cite I can show my boss to support being able to "borrow" from ER cons or other money types/sources? We agree that the above says earnings are not included, so the argument can be made that this applies to negative earnings to, but this also says the employee can withdraw his elective deferrals only.

[Guest MTransue]

If I may add an interpretation; the sentence says "generallY limits." I read that to mean that the employer can be more generous if they choose and allow for employer money to be withdrawn.

In my experience, I have seen generous documents that allow for h/w from any account that is 100% vested or not, or deferrals only.

Administratively, it's easier to track deferral w/d, as opposed to the other options, especially if the participant is only partially vested. It makes for termination distribution nightmares!

[Guest FREE401k]

Thanks for the responses.

[Guest FREE401k]

Here are my bosses comments regarding the "generally limits" phrase in the reg I cited above:

The "generally limits" comment refers to the AMOUNT, not to the LAW. That is, the AMOUNT is "generally limited" to EE deferrals (i.e., not the match nor earnings), as, generally speaking, that is the only type of money that exists in the typical 401(k) Plan.

HOWEVER, if there is "after-tax" money, or a former profit-sharing plan funds, i.e., NON-401(k) type money in the 401(k) Plan, then the Plan could be generous and allow a HSWD to dip into these other types of money. So, the AMOUNT is "generally limited" but not always, as other non-401(k) money may be on hand.

But note: the LAW always limits the HSWD. In short, we can never simply decide to be generous and thus allow a HSWD to include match money. The LAW does not allow that.

[Richard Anderson]

Hardship withdrawal is allowed from all sources, if allowed by the document. Hardship withdrawal from 401(k) deferrals is limited to contributions. No such restriction exists for hardship distribution from other sources, such as match or profit sharing.

Cites from CCH or the regs, without checking what the plan document allows, will not tell you much.

As Jim Kais said check the plan document. From what sources are hardhip withdrawals allowed?

[Guest FREE401k]

Thanks for the comments. The Plan document currently states that hardship withdrawals are allowed "...up to the lesser of 100% of his Participant's Salary Reduction Account or the amount necessary to satisfy the immediate and heavy financial need...".

So right now it is clear that the participant can only withdraw his contributions. We are asking the question about withdrawing from other sources because we are re-doing the Plan document this year for all the GUST stuff, and could amend it at that time to allow hardships from other sources of money if the regs permit. We've heard lots of people say this is permissible, but cannot find a reg that says so. My boss keeps going back to the cite in my post above that says "The amount of the hardship distribution is generally limited to the amount of the employee's elective deferrals." I am trying to show him where it says that money can be taken from other sources, and if I can find it, we will amend the Plan document to state that.

[Richard Anderson]

There is little guidance on hardship distributions before the 401(K) regs were issued. But hardship withdrawal provisions fit under 1.401-1(B)(1)(ii) which states that distributions to a profit sharing plan may be made in the following situations:

1. After a fixed number of years

2. After the attainment of a stated age; or

3. Upon the occurrence of some event, such as layoff, illness, disability, retirement, death, or termination of employment

Hardships distributions fit condition 3 above.

[david shipp]

Rev Rul 71-224 is still the general rule for hardship withdrawals. Although it is pre-ERISA, it has not been revoked or superceeded.

The 401(k) regs override RR71-224 to the extent of elective deferrals, QNECs and QMACs. The 401(k) regs do not address "non-401(k)" types of contributions and thus do not override RR 74-224 in that regard.

Also, take a look at any number of prototypes which allow hardship w/d of non-401(k) amounts and offer the option of applying 401(k) hardship restrictions or using "old" 71-224 rules for those amounts.

[Guest FREE401k]

Thanks for all the responses! I enjoy the debate yet sometimes wish the subject matter was not so complex. I think my original question has gotten a little turned around, or maybe I'm not understanding the responses. The last few responses seem to address the withdrawal of non-401(k) money in the event of a qualifying hardship, and we agree that non-401(k) money can be withdrawn. However, we're trying to figure out if employer match can be withdrawn. Here's the hypothetical scenario: an employee hired, say, one year ago has contributed $1000 to the 401(k), and the Plan Sponsor has contributed a $600 match for him. Earnings have been negative, so the employee account has "shrunk" to $900 and the match account to $500. He has no other sources of money. If the employee has a qualifying financial hardship of $1000, can he withdraw $900 or can he withdraw $1000 by "borrowing" $100 from the match account?

[Richard Anderson]

From your prior post:

"The Plan document currently states that hardship withdrawals are allowed "...up to the lesser of 100% of his Participant's Salary Reduction Account...."

100% of the Salary Reduction Account would be $900.

[david shipp]

Several different issues here.

First, employer match that is not QMAC is non-401(k) money. The posts seem to indicate that the withdrawal of non-QMAC match is restricted and that is the source of confusion, if I am interpreting correctly.

Second, if the plan says only elective deferrals are available, only $900 is available and the participant has $100 of "basis" available for hardship withdrawal in the future if the elective deferral account ever goes positive. (Note that this $100 would be added to future deferrals for purposes of determining available hardship w/d amounts.)

Third, if matching contributions were available under the plan for hardship withdrawal, the participant could get the full $1,000, but there would really be no "borrowing." As in the above item, he would still have $100 of elective deferral "basis" for later withdrawal.

[Guest FREE401k]

Richard, thanks for the comments. We are asking the question about withdrawing from other sources because we are re-doing the Plan document this year for all the GUST stuff, and could amend it at that time to allow hardships from other sources of money if the regs permit. We've heard several people say this is permissible, but cannot find a reg that says so. We agree that as the document is written now this is not permissible, but want to know if this is something we could amend the document to allow, and if it is, we need a cite for it. Thanks!!