Stopping Deferrals

[Guest Dook]

Must all 401(k) plans allow participants to stop deferrals at anytime, or only those plans that allow hardships under the safe harbor rules?

TR 1.401(k)-1(d)(2)(iii)(B)(3) under "necessary to satisfy a financial need" provides for the "cessation of elective contributions", as a criteria of the financial need test under safe harbor. I have always interpreted this to require that these safe harbor plans allow participants to stop deferrals at any time as a way to possibly avoid a hardship withdrawal. Am I correct?

Is there anything that extends to all 401(k)s?

[E as in ERISA]

I asked a similar question on 6-4 labeled "Revoking an election." Per my search of earlier threads, it appeared that the answer was that state law sometimes requires that employees be allowed to stop salary reductions at any time (including loan payments!) but that the code did not specifically required it. I suggested that maybe the "cash availability" requirement of 1.401(k)-1(e)(2) requires that participants be given the regular opportunity to elect cash (which seemed to be a key factor in the approval of automatic 401(k) enrollments). I think that some thought that once a year or so is regular enough. I'd feel comfortable with something more frequent than that....but I don't know about "any time."

[Mike Preston]

Checking the LRM's, we find the following:

"The plan must also specify a reasonable period at least once each calendar year during which a participant may elect to terminate an election or to modify the amount or frequency of his or her Elective Deferrals. "

Hence, there doesn't seem to be a legal requirement, from the IRS' perspective. However, it is generally considered bad for participants to restrict their ability to eliminate deferrals.

Maybe an employer might want to do this in a plan where deferrals aren't being encouraged (such as a safe-harbor plan), but otherwise, I wouldn't think it a terribly good idea.