Hardship Withdraw

[Guest agsmith]

I've got a know-it-all participant (don't we all) who insists that hardship withdraws are a mandatory feature of profit sharing 401k plans. She has forwarded me the IRS regs regarding Hardship Withdraws and when I explain that they are for following only if the plan allows for them, she want me to get a legal opionon. (yeah, I'll get right on that)

Can anybody site a treasury or irs reg that states that hardship withdraws are optional?

Thanks in advance.

[Guest agsmith]

ERISA rule will work as well.

[E as in ERISA]

It's difficult to prove a negative. Tell the employee to show you where that's a required provision. Or maybe you could show the employee Section 2.07(2) of Rev. Proc. 2002-47 that indicates that it’s an operational failure to make hardship distributions if the plan doesn’t provide for them? (But be careful because the correction method is to amend the plan to provide hardships. She will probably say that it requires you to amend!).

[austin3515]

There must be someting in the 401(k) answer book as well..

[Guest agsmith]

Thanks Katherine. I think I'll stay away from that one for the time being.

Austing 3515, I tried the Answer book, I send her the reference in there that it was optional and she replied "With all due respect, and not to disparage your 401(k) Answer Book resource, might I suggest you actually read the IRS code section pertaining to hardship withdrawals, or seek some legal advice about this issue, before you make a final determination that hardship withdrawals are only an optional feature for 401(k) plans?"

WHAT FUN!!!!!!!!!!!!!!!!

I also just found ERISA section 206 that refers to payment of benefits, I think I'm going to give that a try.

[MGB]

How about 1.411(d)-4, Q&A 2 (although this says you can eliminate them, the same logic should apply to never having them to begin with):

"(x) Amendment of hardship distribution standards. A qualified cash or deferred arrangement that permits hardship distributions under §1.401(k)-1(d)(2) may be amended to specify or modify nondiscriminatory and objective standards for determining the existence of an immediate and heavy financial need, the amount necessary to meet the need, or other conditions relating to eligibility to receive a hardship distribution. For example, a plan will not be treated as violating section 411(d)(6) merely because it is amended to specify or modify the resources an employee must exhaust to qualify for a hardship distribution or to require employees to provide additional statements or representations to establish the existence of a hardship.

A qualified cash or deferred arrangement may also be amended to eliminate hardship distributions.

The provisions of this paragraph also apply to profit-sharing or stock bonus plans that permit hardship distributions, whether or not the hardship distributions are limited to those described in §1.401(k)-1(d)(2)."

[Tom Poje]

Hey, its restatement time, so if you use a document checklist why not just give her the page that says

plan allows hardships: NO

then maybe copy the dictionary definition of NO

[MWeddell]

This proving a negative stuff is becoming a recurring theme lately.

Internal Revenue Code section 401(a) only states the minimum requirements for a qualified plan. If it's silent regarding an issue, that means you can do it and it won't make your plan cease to be qualified. If someone thinks there's a requirement -- e.g. the plan must offer hardship withdrawals -- then the burden is on the person making the assertion to prove that it's so.

[KJohnson]

I agree with MGB and I think that is the best you are going to find in the regs.

You can ask the participant why there would be a regulation that says you can eliminate something that is mandatory?

Also the IRS's examination guidelines for CODA's contain the following examination steps with regard to hardship provisions:

Examination

Steps

(1) Inspect the language in the plan document to determine when and under what circumstances distributions can be made.

(2) Inspect the language in the plan document to determine if hardship distributions are allowed and under what circumstances (general or deemed standards)....

[Guest Jennifer Reid]

The IRS has approved and issued favorable determination letters on many plans (both individually designed and prototypes) that do not offer hardship withdrawals; therefore, the IRS apparently believes that to be an optional feature as most everyone else does.

[Guest death and taxes]

And if it were me, I'd just say "It's not an option." And to the request for legal opinion, tell her to get her own. Don't waste your time. Maybe I'd say, "It's not an option. So, sue me." Just joking--people can be so unreasonable!

[E as in ERISA]

Send her a link to this message board.

[jpod]

If you were involved with putting the plan's terms together for the employer, a word of warning: make sure your boss/client understands that your plan could but does not offer hardships before you run off and tell the participant that "it's not an option."

I would not like to see you get burned if the participant then runs back to his/her boss and makes a stink. The boss may say to you: "Why don't we allow hardships? If you had explained hardships to me, I would have insisted that we allow them. I expect you to take care of our plan so that I don't have to deal with complaints like this."

Whether such a comeback would be fair or not, it's always better to try to head these issues off at the pass.

This is just common sense, agsmith, so please forgive me.

[RCK]

A couple more options:

1. Track down the number for your local DOL/PWBA office www.dol.gov/pwba/welcome.html and give that to her. Let her call to get an answer. When she fianlly finds someone who understands the question, she will find out that it is not required.

2. Assuming that the point of all this is that she wants to request a hardship, tell her to submit a written request, treat it as a claim for benefits, carefully consider the merits of her request, and deny the claim.

RCK

[Guest agsmith]

Thanks for all the Input. I hope that my last response sufficed. I am going to take her the plan document checklist and the commentary on each section.

-AGSmith

[austin3515]

Katherine -

I like your last response the best!

Does it get more authoritative then this message board? I think not!