Guest sroenigk Posted February 4, 2003 Posted February 4, 2003 Hardship withdrawals are not eligible for rollover, thus federal tax withholding is voluntary. If a 401(k) plan allows in-service withdrawals from a rollover source, 20% mandatory federal withholding applies to payments made to the participant because the rollover is eligible for a rollover. I understand the 10% penalty if no exception apllies under age 59 1/2. My question: may a participant request a hardship withdrawal from his rollover source of money? Let's say the plan does not allow in-service withdrawals, except for financial hardship. Would he be eligible to take a hardship withdrawal of the rollover source and not be required to withhold 20% in taxes. What if the plan permits in-service withdrawals from a rollover source? Is he required to withdraw the rollover source first as an in-service withdrawal and pay the 20% in taxes? Or can he request a hardship withdrawal and avoid the mandatory withholding.
QDROphile Posted February 4, 2003 Posted February 4, 2003 The plan document will tell you the sources and the priority. If it does not, then the person with authority to interprest the plan (a fiduciary) must tell you the sources and the priority. An intelligent fiduciary would ask to have the plan amended to clarify rather than be forced to interpret a deficient plan. Priority is not governed by external rules.
E as in ERISA Posted February 4, 2003 Posted February 4, 2003 It is my understanding the the only hardship withdrawals that are "not eligible for rollover" are 401(k) hardship withdrawals (those described section 401(k)(2)(B)(i)(IV)). (Those are the only ones subject to the strict IRS rules; a plan can have its own rules for hardship withdrawals from other sources). I assume that any other hardships would be eligible for rollover. See IRS Notice 99-5 at http://www.benefitslink.com/IRS/notice99-5.shtml .
Guest sroenigk Posted February 4, 2003 Posted February 4, 2003 In this instance I prepared the adoption agreement from a protoype plan document for the client. The trustee can amend the plan to include the rollover source as being available for hardship withdrawals. Therfore, qualifying it for voluntary tax and avoiding the 20% mandatory withholding. Thanks for the advise! Scott
Mike Preston Posted February 4, 2003 Posted February 4, 2003 You should re-read what Katherine wrote.
Guest sroenigk Posted February 4, 2003 Posted February 4, 2003 I would like to read this section referenced by Katherine. Does anyone know how to find it on the internet?
QDROphile Posted February 5, 2003 Posted February 5, 2003 I think you all should read section 402©(4)© of the Internal Revenue Code and compare it to the version before the amendment by P.L. 107-16.
E as in ERISA Posted February 5, 2003 Posted February 5, 2003 I stand corrected! Interesting....So a plan can have "hardship" provisions for the non-401(k) sections of the plan (that don't comply with the strict 401(k) hardship rules) and avoid mandatory 20% withholding?
Guest Do Posted February 5, 2003 Posted February 5, 2003 Yes, 20% withholding is not required on hardship withdrawals because they are not rollable.
E as in ERISA Posted February 5, 2003 Posted February 5, 2003 But you could use lenient requirements for hardships for non-401(k) money (e.g., you don't have to suspend contributions; you could make purchase of a car a hardship event, etc). And these withdrawals would not be subject to 20% withholding now?
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