Hardship after Loan

[kocak]

Participant has a 401(k) balance of $2,500. This is $2,000 contributions and $500 earnings. Participant takes a loan for $1,250. Particpant's balance has experienced a loss and the account is now worth $800. Participant wants to take a hardship distribution. Any ideas on how to calculate the eligible hardship amount? Thanks.

[Medusa]

Hey I know you!

In my opinion, the individual should get the lesser of their total contributions or the amount available. In this case the latter applies and they should be able to get $800. What, if anything, bothers you about this?

[kocak]

Do I know you?

I am concerned about allowing a participant to take their entire 401(k) balance. It seems an odd result to me and I wanted to make sure I wasn't missing something. Thanks for you input!

[bzorc]

In a plan that I administered, I routinely saw participants "drain" their money through loans and hardship withdrawals, so that their only account balance remaining was outstanding loans. They would make payments and deferrals, and when they got enough money in the plan, would take another loan (plan allowed for 9 outstandling loans at once, ain't that a hoot??), sending their actual money back down to zero.

So no, you're not missing anything, and yes it is an odd result.