Hardship Distribution

[chris]

Participant wants to apply for hardship distribution under PSP that uses the 401(k) safe harbors to establish heavy/financial need, i.e., medical expenses, tuition expenses, funeral, purchase of residence, prevent eviction (+) need that would apply to all participants in a similar situation. Participant says needs distribution to prevent having to file bankruptcy. First, assuming participant provides sufficient info. to back that up and assuming other participants similarly situated are later allowed to apply for hardship distribution on the same basis, then need may be OK. Second, the PSP allows for participant loans. Wouldn't the language in the Regs. allow for the participant to not have to first get a loan in the maximum amount available on the basis that doing so would put them in worse shape as to their need? Thanks.

[QDROphile]

Preventing bankruptycy is a nonspecific catch-all proposition. Give some very serious consideration to whether or not it is a legitimate reason.

[chris]

Participant has also provided a letter outlining their financial situation. Appears that husband's salary has significantly decreased and bill collectors have begun to call them regularly within the past few months. Although not expressly mentioned in the letter, foreclosure may be forthcoming, and that in and of itself would be a permissible need. I understand that the participant is a very good long time employee and not one to even entertain such a request without giving serious thought. It does appear to be a legitimate request.

[QDROphile]

This is from the Internal Revenue Manual:

(6) Under Reg. 1.411(d)-4, a section 401(k) plan may not have a “catch-all” hardship category (for example, “and other events which the plan administrator deems to be hardships”) because this would be impermissible employer discretion. The plan may be amended to add or eliminate a hardship category or to change the conditions for receiving a hardship distribution and this will not violate IRC section 411(d)(6). Hardship categories (general or deemed) must be both currently and effectively available to a group of participants that satisfies Reg. 1.401(a)(4)-4.

[chris]

Don't know if it makes a difference but the plan is a PSP and not a 401(k). The last category within the Plan doc provision regarding hardships is "An immediate and heavy financial need of the Participant provided that the Administrator applies the need to all the Participants in a uniform and discriminatory manner." It is a Corbel Volume Submitter PSP document with IRS approval. I assume the last part re "uniform and nondiscriminatory manner" keeps it in in line with the last part of the language you quoted.....?

[E as in ERISA]

IRS rules on distributions from PSP not nearly as stringent. Hardship is very limited exception under 401(k) plan. Not so under a PSP. Much easier to take distribution. Can set up hardship rules however you want. Don't have to follow 401(k) regs. Just need to follow plan rules.

Like QDROphile says the main concern is how broad you want to open it up to everyone...

[Archimage]

You mentioned they use the 401(k) safe harbor rules. I assume this is actually written in your document. If you do the distribution then you have failed to follow the terms of the plan document which is a possible disqualification issue. Why not just amend the document before you do the hardship?