6-month waiting period after hardship withdrawal

[Guest bmurphy]

Have a client who has funds invested in 2 separate 403(b) custodial accounts: one is in a "frozen" state (no ongoing contributions), the other is being funded through salary deferral. If client takes a hardship distribution from the frozen account, does the 6-month wait on deferrals apply to the "active" account. Didn't know if the rules can be applied separately to each custodian or if both accounts are treated as one since they were funded through the same employer.

[QDROphile]

What makes you think distribution is available on account of hardship and what makes you think there is a 6 month suspension on deferrals?

Neither is required by law, so the features must be because of plan design, although I am suspicious about the 6 month suspension. Your answers are found in the plan terms and the minds of the persons who interpret them. You need to go there.

[Guest Wendy Blinn]

Since there are not specific 403(b) regulations that address this, one would assume that the 401(k) regulations would apply. Suspension of deferrals by the plan prohibits an employer from deferring or making any employee contributions for at least 6 months (12 months for any distribution before January 1, 2002) after the hardship distributions, to all plans maintained by the employer.

[QDROphile]

Sorry Wendy. You fell into the trap of thinking that what the mediocre institutions sell to the masses is what is required by law. The suspension of deferrals after hardship that you find in the 401(k) regulations is a design option for persons who want to operate mechanically instead of using their heads for better purposes. It is not a legal requirement.

[Guest Wendy Blinn]

The reduction of the suspension period from 12 months to 6 months is required by EGTRRA section 636 if the plan is a safe harbor 401(k) plan that allows for matching contributions. You are correct that other plan designs may permit the longer suspension period of 12 months. The actual plan will state the length of suspension.

[rcline46]

The correct answer is to read the plan document. Whether it is a frozen account or active account does not matter. What matters is the plan document.

If hardships in the document do NOT refer to the safe harbor rules, but are determined administratively, there very well may not even be a suspension of benefits. If hardships are not mentioned in the document then a hardship withdrawal cannot be taken.

[MGB]

Wendy,

I agree with QDROphile, there is no requirement to have a suspension at 12 months, 6 months, etc. (EXCEPT for a safe harbor 401(k) plan).

Using a suspension at all is an attempt to meet the safe harbor (not the same safe harbor as 401(k)) for determining if there is a substantial need. There are other ways to determine it without a suspension.