Consequences of non-safe harbor hardship distribution

[mariemonroe]

I have a 401(k) plan that provides for hardship distributions. They have a participant who wants a distribution which does not meet the safe harbor events test (i.e. it is not for payment of medical, educational expenses, payment of residence or to prevent foreclosure).

If they make the distribution and it is discovered that it does not meet the facts and circumstances test (for example, if the plan was audited) , what are the consequences?

[david rigby]

Perhaps I misunderstand the question. Are you saying the plan is being asked to make a distribution not permitted by the plan provisions?

[mariemonroe]

No. The plan provides for hardship distributions. But the participant who is requesting the distribution does not meet the safe harbor for immediate and heavy financial need (i.e. not for payment of medical expenses, educational expenses, payment for primary residence or to prevent eviction or foreclosure). Therefore the plan would base its decision to make the hardship distribution on whether the participant meets the facts and circumstances test. I am trying to determine the consequences to the plan if it decides to make the hardship distribution (under the facts and circumstances test) and it is later determined (on audit) that the distribution was improper. Basically I want to advise the plan of its exposure if it decides to make the distribution without the benefit of the safe harbor. Could the plan be disqualified?