SH NE given in Hardship Distribution

[Dawn Hafner]

Has anyone ever run into the situation where a SH NE source was incorrectly distributed along wtih 401(k) money in a hardship?

According to what I can find the correction method appears to be to request the funds back from the particiapart. One of the Q&As on plan correction indicates that it should not be necessary to have ER make up the distribution amount if the participant decides not to refund the plan as this would unjustly enrich the participant. The Q&A goes on to recomend that you file for approval with IRS however under VCO as this is not a safe harbor method of correction.

Has anyone submitted under VCO for a similar issue and if so what was the IRS response?

Thanks.

Dawn

[lkpittman]

I'm not sure what "SH NE source" is, but we've got a situation where an employee recieved post-88 earning with her hardship distribution. We're submitting under VCO (anonymous). Proposed method of correction is to request the money back from the participant (taking "reasonable steps" to have the $$ returned). The participant had already used all of the $$ to buy a home. Employer even suggested to her that she take out a loan from another source to repay the money. She claims her credit is "maxed out" after the purchase of her home and cannot repay the money. We're also asking that the employer not be required to repay the trust because "a corrective contribution of the improperly distributed amount to the Plan, would have the effect of restoring a benefit amount which was already paid to the participant and would result in a windfall to her."

We haven't submitted this yet--it is with the client and should be going out soon. I'd be interested in any responses you get. Is you situation similar?

[Dawn Hafner]

"SH NE" refers to Safe Harbor Nonelective, so we have a very similar issue in this case. Funds not eligible for HS distribution were actually distributed.

Thank you very much for your response. That is very helpful. I would also be interested to hear from anyone else that has done a submission for a similar issue.