Six month waiting period to defer after hardship withdrawal.

[katieinny]

I have a client who would prefer to permit deferrals to continue after a hardship withdrawal, rather than forcing a 6 month waiting period. What's the purpose of the waiting period and is there a way around it?

[QDROphile]

The purpose is to allow automation. Unless that is compelling, don't use the safe harbor. Life is not so dangerous outside of it. You will need proper plan and adminstration documentation and at least one brain for administration. Bye-bye prototype.

[katieinny]

I looked again at the EGTRRA language that reduced the waiting period for deferrals down to 6 months after taking a hardship distribution. It looks to me like it only applies to 401(k) deferrals and did not get extended to include deferrals under 403(B) plans, which means that the 12 month rule still applies to them.

I specifically noticed that the language says for a period of "at least" 6 or 12 months (whichever is applicable), which means that an employer can't be generous and permit employees to continue deferring immediately after a hardship withdrawal takes place. In fact, it sounds like an employer could keep a participant from deferring for a much longer period of time -- maybe a couple of years or so if he wanted to put that language in the plan.

[Ellie Lowder]

Since 403(B) does not have its own hardship withdrawal rules, the 401(k) hardship rules are considered to apply (right now the IRS is writing 403(B) regulation so we'll have our very own someday) - thus, many are assuming that the safe harbor rule change to 6 months of suspension of deferrals also applies to 403(B)- that is how the bulk of the industry is treating the change.

[katieinny]

Since my client is in the process of restating the 403(B) plan, do you think it's safe to include the 6 month language in there?

[Guest RPSS]

I have a related question. What happens if a 403(b) participant continues to make deferrals into the plan even after the hardship distribution? Do these deferrals need to be removed? How? Are they considered excess contributions?

[kocak]

I've always thought the reason for the wait on resuming deferrals after a hardship was because if the participant could afford to continue making deferrals you have to ask the question, do they really qualify for a hardship distribution?

Michele

[QDROphile]

The problem with that explanation is that the need is at the time of the distribution. Once the need is satisfied by the distribution (and the distribution is bigger than the next deferral), why would you assume that the person's economic ability to save from future income would indicate inability to fund the need at the time of distribution?

I think the only way to explain it, other than admit it is just a rule, is that it is a penalty for lying about being destitute in order to get a distribution. The penalty was a real one under pre-EGTRRA rule. Now it is just a joke. You can lie and still get full deferral unless you get stuck because of year end timing.