New guidance: hardship and top-heavy

[MGB]

Notice 2001-56 was released this afternoon.

The effective date for the new definitions of key employees for top heaviness is determination years in 2001 (to determine top heaviness in 2002).

The effective date for mandatory nonparticipation following a hardship distribution includes distributions in 2001. Therefore, the period may end at the later of 6 months or 1/1/2002.

Also, Notice 2001-57 contains the model good-faith amendments (and adoption agreement language) for all of EGTRRA.

[Guest Jose Rosario]

I was hoping the guidance released today by the IRS concerning EGTRRA, including the model amendments, would clarify (for me) the operation of the subsequent year deferral limit after hardship withdrawal under Treas. Reg. 1.401(k)-1(d)(2)(iv)(B)(3), but it does not, or at least I have not found it. The reason I wanted clarification is because of the possibility of a suspension period beginning and expiring within one taxable year; how would this impact (if at all) the annual 402(g) limits?

Therefore, I don't think it matters in what year a "hardshipper's" six month suspension expires. I think the proper application of the rule is that it continues to operate, without change, notwithstanding the shorter suspension period. Thus, it seems that all "hardshippers" are limited in the next year, regardless of which year (the current or the next) the suspension period expires. The controlling factor is not when the suspension period expires, it is when it begins: "hardshippers" are equally limited in the subsequent taxable year, notwithstanding that their suspension period is entirely within one taxable year or crosses into the next taxable year.

Any comments??

[MGB]

I am not sure I understand your question. Are you just referring to 402(g) limits, or all issues in general?

If the 6 months begins and ends in the same year, why would that affect the next year?

[Guest Jose Rosario]

Thanks for asking.

Under the old rules, after the expiration of the 12 month suspension period, a participant was limited in the taxable year after a hardship withdrawal from a safe harbor plan to deferring

the 402(g) maximum for that second year, minus whatever amount he deferred in the year of the withdrawal. Treas. Reg. 1.401(k)-1(d)(2)(iv)(B)(3).

My question is how that reg is applied now under a six month suspension?