Hardship w/drawl question

[Guest DeePA]

Is it true that you can only take a hardship w/drawl from 401k deferrals for the safeharbor reasons (medical expenses purchas prim. resid. etc), but that you can open up other money sources (match etc.) to non-safeharbor reasons as long as it suits financial need?

Or can both deferrals and match be opened up for financial need other than 4 safe-harbor reasons?

Does it matter if you are on prototype or not?

Thanks

[Belgarath]

I don't believe so. See 1.401(k)-1(d)(2)(ii.) I think you are limited to deferrals only, whether you are using the safe harbor or not.

[QDROphile]

Amounts other than elective deferrals can be available for hardship distributions, subject to plan terms. You are not relying on the 401(k) rules for justification of the in-service distributions because the other amounts are not subject to 401(k).

There is some twist if you have a safe harbor plan -- safe harbor for the ADP test, not safe harbor for hardship withdrawals. I don't remember the details, but it relates to the requirement that the safe harbor contributions be treated in accordance with the rules applicable to elective deferrals.

[Belgarath]

I think Qdrophile is right. But I also think that the plan terms will be required to contain certain restrictions. For example - a pension plan generally can't allow in-service withdrawals unless you have attained normal retirement age. So you couldn't have a hardship withdrawal allowed for a 25 year old who hasn't terminated employment, because the IRS wouldn't approve such a provision. And in a PS plan, then you'd have to have satisfied restrictions other than purely hardship - for example, the "2 year" rule before a hardship could be allowed. Qdrophile, does that jibe with your understanding?

[QDROphile]

Not quite. For profit sharing money, like match and discretionary employer contributions, I think hardship can be the "event" that allows distribution and you would not need another exception such as the 2 year seasoning. For what it is worth, that has been approved in volume submitter plans.

Complete agreement on money purchase plan.

[Guest DeePA]

Thanks for your help.

I think i found something...apparantly one of the List of Required Modifications to a prototype is that deferrals can only be taken for safe harbor hardship reasons, match/ps can be taken for facts and circumstances. Under volume submitter or Ind. designed deferrals can be taken for facts & circumstances.

dee

[g8r]

DeePA,

You are correct. For prototype plans, elective deferrals can only be withdrawn on account of a hardship that satisfies the safe harbor conditions in the 401(k) regs. For individually designed plans, including volume submitter plans, the IRS doesn't "currently" mandate that the plan be drafted to include the safe harbor conditions. There is a proposal to change this when volume submitter plans are updated for EGTRRA, but that's just in a draft procedure and will hopefully be dropped before it is finalized.

For unrestricted amounts (regular P/S contributions and matching contributions that aren't QMACs), a facts and circumstances test can be used in both prototypes and volume submitter plans. And, the facts in circumstances is not the same standards found in the 401(k) regulations (1.401(k)-(d)). Those rules apply to facts and circumstance for distributions of elective deferrals. Regular p/s and matching contributions are not subject to that regulation. Instead there was an old revenue ruling that is very vague as to what constitutes a hardship. For that reason, many plans are drafted by applying the 401(k) facts and circumstances provisions to these other amounts.

Remember that QNECs, QMACs, Basic or Enhanced ADP safe harbor matching contributions and nonelective safe harbor contributions (i.e., the 3% safe harbor), can't be withdrawn for a hardship.

[AmyR]

I read these posts with interest, as I am currently working with a plan that has traditionally allowed hardship distributions from Employer profit sharing and match accounts only. Their recordkeepers could not tell them how much of the 401k accounts were due to contributions vs. earnings and this just seemed easier. The hardship policy that goes with the document basically states the 401k safe harbor rules for determining if there is a "hardship."

My question is, in this type of situation, must the Employer require the participant taking the hardship distribution to cease 401k deferrals for 6 months? I would have guessed no, because it has nothing to do with the 401k rules, but I would appreciate hearing from others what they're doing in practice. Thanks in advance!

[R. Butler]

My question is, in this type of situation, must the Employer require the participant taking the hardship distribution to cease 401k deferrals for 6 months? I would have guessed no, because it has nothing to do with the 401k rules, but I would appreciate hearing from others what they're doing in practice. Thanks in advance!

Really can't answer the question without seeing the precise wording the document. Having said that, I do exactly what the document says. If for hardship withdrawals from employer sources the Adoption Agreement references a section that requires the suspension of deferrals, we recommend that the employer suspend deferrals.

[AmyR]

Thanks for the comment. Unfortunately, I am currently reviewing the hardship policy for my client that will state the rules (the document company treats the hardship policy as an addendum to the document and the volume submitter document does not discuss the hardship rules). So, I am trying to help set the rules for the administrator.

The hardship policy drafted is a standard one for 401k plans, revised to state that it only applies to employer accounts (ps and match). As I reviewed the policy and researched the issue, I wasn't sure that the standard suspension language was required once this change was made. However, I can't find any commentaries that have come right out and said this.

My client doesn't want to be required to suspend deferrals, as it is just one more thing to miss, but gives the participants the option to suspend. However, if it is a gray area, I guess it is better to make sure it is required.