Maximum Suspension for Hardship Distribution

[bvhea]

Can a 401(k) plan that is not using a safe harbor for either the ADP or ACP tests provide for a suspension period of more than 12 months for those participants that take a hardship withdrawal? Alternatively, could the plan provide that a participant that receives a hardship distribution could start deferring again after 6 months, but provide that they would not be eligible for matching contributions until 12 months after the hardship distribuiton?

[QDROphile]

Why would anyone want to do any of those things?

[E as in ERISA]

Some maintained the 12-month rule after the change to six months. The 6-month rule w/delay of match would be more complicated. Delaying match doesn't support the conclusion that the person needs a hardship. It would cause you to have different rates of match for participants with benefits/rights/features issues. And it would be an issue on testing.

[bvhea]

The plan sponsor is a mortgage company. The loan officers are experiencing some tough financial times in the current market and many of them would like to access their 401(k) accounts through hardship withdrawals. The sponsor doesn't want these loan officers to resign just so they can get to their funds, but he also doesn't want to deal with a lot of participant loans. He wants to penalize those participants that do take hardships as a way of discouraging this.

[Guest mjb]

I thought that 6 mo suspension period was a minimum period. Check the 401k regs.

[Archimage]

Almost. If you have a plan that has a safe harbor match, then you must reduce your suspension to six months.

[bvhea]

Almost. If you have a plan that has a safe harbor match, then you must reduce your suspension to six months.

This plan does not use a safe harbor. Thanks to all who replied. My final question is if there is any maximum period for which deferrals could be suspended. Sal's book and several of the replies agree that 12 months is okay. How about 24 months?

[QDROphile]

I think someone needs to beat some sense into the plan sponsor. And someone needs to talk to you about issues involved in trying to humor idiots. Either allow hardship withdrawals or don't. It is shortsighted to the point of blindness to consider the sorts of things you mention.

[bvhea]

I think someone needs to beat some sense into the plan sponsor. And someone needs to talk to you about issues involved in trying to humor idiots. Either allow hardship withdrawals or don't. It is shortsighted to the point of blindness to consider the sorts of things you mention.

I don't make a habit of humoring idiots. On the other hand, this man has taken a mediocore mortgage firm and transformed it into a multimillion dollar enterprise that is one of the leading mortgage firms in a multistate area. If the rest of my clients were half as smart or successful as this one, my life would be a lot easier. Anyway, I was looking for serious responses to a legitimate question, not advice on how to deal with my clients or run my company.

[wsp]

Almost. If you have a plan that has a safe harbor match, then you must reduce your suspension to six months.

This plan does not use a safe harbor. Thanks to all who replied. My final question is if there is any maximum period for which deferrals could be suspended. Sal's book and several of the replies agree that 12 months is okay. How about 24 months?

My two cents on your situation....

Given that the ability to take a hardship doesn't effect plan participation, I can't see how the extending of suspension time will prevent an employee from taking that hardship distribution. They will justify the need and the action no matter what the length of time is. So, to me that penalty has no correlation to the action and is excessive. But, that's just my opinion.

I find it odd that such a punitive action is being considered given the employer's industry. I am also finding it morally troublesome that such an action is being considered as a means of avoiding a little extra work. Yet at the same time there is a profession of not wanting to lose a valued employee. If the employee is so valuable then 1) why not allow them to access the assets to get out of a hardship situation and 2) why would you subject them to such long lasting damage to their retirement savings?

But, your question leads me to another one. Assuming that the hardship suspension period is a minimum and you can extend the period beyond the one year window, would you still be able to count those people as eligible and benefitting for purposes of 410(b)? Suppose you extended it beyond even those 24 months and made it 36 or 48? Still eligible and benefitting?

[bvhea]

My two cents on your situation....

Given that the ability to take a hardship doesn't effect plan participation, I can't see how the extending of suspension time will prevent an employee from taking that hardship distribution. They will justify the need and the action no matter what the length of time is. So, to me that penalty has no correlation to the action and is excessive. But, that's just my opinion.

I find it odd that such a punitive action is being considered given the employer's industry. I am also finding it morally troublesome that such an action is being considered as a means of avoiding a little extra work. Yet at the same time there is a profession of not wanting to lose a valued employee. If the employee is so valuable then 1) why not allow them to access the assets to get out of a hardship situation and 2) why would you subject them to such long lasting damage to their retirement savings?

But, your question leads me to another one. Assuming that the hardship suspension period is a minimum and you can extend the period beyond the one year window, would you still be able to count those people as eligible and benefitting for purposes of 410(b)? Suppose you extended it beyond even those 24 months and made it 36 or 48? Still eligible and benefitting?

Thanks for the reply. The client is thinking that this will deter some participants from taking the hardship as they will lose both the abilitity to defer and also the benefit of a matching contribution on the missed deferrals. I think he will go with the 12 month suspension, however I was curious as to the availability of a longer suspension. I am also very interested in the answer to your questions as to if they would still be considered eligible and benefiting.

[wsp]

Thanks for the reply. The client is thinking that this will deter some participants from taking the hardship as they will lose both the abilitity to defer and also the benefit of a matching contribution on the missed deferrals. I think he will go with the 12 month suspension, however I was curious as to the availability of a longer suspension. I am also very interested in the answer to your questions as to if they would still be considered eligible and benefiting.

Not presuming that you would tell your client what to do as it's his call. But....if it's a true economic hardship then they are going to take the distribution no matter what the penalty. Raising it to 1 year or even 2 years (if legal) won't stop them from taking the distribution. So, in an effort to deter Participant A (who isn't really in a hardship position) he is punishing Participant B who really is in one?

Bit mixed up to me.....I'm guessing that the ability to reduce the matching contribution obligation without having to be the bad guy is coming into play here.

[Tom Poje]

for some reason no one has quoted the regs

the wording in the old regs 1.401(k)-1(d)(3)(iv)(B)(4)

"the employee is prohibited....for AT LEAST 12 months..."

so obviously a period longer than 12 months was permitted.

the new regs 1.401(k)-1(d)(3)(iv)(E)(2) "....at least 6 months..."

as to a maximum period I have never read anything on that. we know you can't have a 2 year eligibility for deferrals, so my own personal opinion would be you couldn't go beyond that (or put another away 12 months plus next entry date seems logical. an ee taking a hardship must 'reestablish' eligibility. but that is an opinion only)

[bvhea]

as to a maximum period I have never read anything on that. we know you can't have a 2 year eligibility for deferrals, so my own personal opinion would be you couldn't go beyond that (or put another away 12 months plus next entry date seems logical. an ee taking a hardship must 'reestablish' eligibility. but that is an opinion only)

Thanks Tom, that was very helpful.