Restrictions on salary deferrals after a hardship withdrawal has been

[Guest Kelly Igel]

I know that EGTRRA reduces the length of time that a participant is prohibited from making 401(k) salary deferrals after taking a hardship withdrawal, from 12 months to 6 months.

Did EGTRRA also remove the requirement that the 402(g) limit for the year in which the salary deferrals resume be reduced by the amount of salary deferrals made during the year in which the hardship withdrawal was taken? I can't seem to find mention of this in the EGTRRA information that I have at hand. Thanks!

[Guest RNorris]

IRS Notice 2002-4 announced that the requirement to reduce the 402(g) limit in the year deferrals resume can be eliminated. Plan's can implement in 2002 for hardships taken in 2001.

[MGB]

Actually, EGTRRA did not do what you said it did. The law does not require any time length of nonparticipation following a hardship withdrawal. It does require the plan administrator to determine that there is an "immediate and heavy financial need" and that the distribution is needed to meet that need. In an IRS regulation, they created a safe harbor approach to this determination. Part of that safe harbor approach is to suspend the participation for one year (if they are in such dire need of the money, they presumably wouldn't be able to afford to defer more money over the next year). Note that this only applies if you are making use of the safe harbor approach; a plan need not do this if they have other procedures in place to determine an immediate and heavy financial need.

EGTRRA did not directly change this. It contains a statement that directs the IRS to change their regulation to state that the safe harbor approach only use six months instead of twelve months (if the IRS decided not to do it, there is no way Congress could force them to do it). In Notice 2001-56, the IRS acknowledged that six months is now correct (even though they have not changed the regulation) for those using the safe harbor approach.

In Notice 2002-4 (released about 12/20, for publication in an upcoming Internal Revenue Bulletin). the IRS rescinded the requirement that applied a single 402(g) limit to two years worth of deferrals around the distribution. Again, this is only for those plans making use of the safe harbor. Note that this is what is "allowed;" changing to six months is not mandatory, nor is the application of the two-year rule. If the plan document states that 12 months and the two-year rule applies, it needs to be amended with a good-faith amendment in 2002. This is not something that can be carried through to 2005 as part of the remedial amendment period because it is not a mandatory change.