Hardship, distributed too much

[Dan]

One of our clients uses a trust company that offers IDA or SDBA or whatever you want to call them. After finally getting the statements for 2006, we determined that the trust company made an impermissable hardship distribution to a participant by distributing more than allowed. I can't find a correction for such an error. The amount in question is about $400. Can the participant pay back the excess amount or is there some other correction?

[masteff]

the trust company made an impermissable hardship distribution to a participant by distributing more than allowed.

What made it be more than allowed?

I'll let someone else address it from the EPCRS side...

From the admin side... My line of thinking is maybe we can justify the extra $400 and thereby make the potential mistake disappear. Some dollar amounts might be helpful.

The first and obvious thing is what's the dollar amount of the supporting documentation for the withdrawal... and what is the tax gross up being allowed on that amount? If you add the $400 to the tax gross up, is it still a reasonable amount for taxes? Note: the tax gross up isn't restricted to the amount withheld, the participant can withdraw enough to cover all taxes and hold the non-withheld portion until they file their tax return.

The second thing would be, does the participant have additional supporting documentation available which (with additional gross up) would cover the extra $400?

[Dan]

The error was made by the trust company. They didn't check with us prior to making the distrbution. But they are supposed to have the same data as we do, but somehow distributed too much. They gave no reason, and how they did it does not concern me. We just need to fix it. And they need to not do this again.

It would be nice if we could use the extra amount for taxes. But the distribution can't exceed maximum distributable amount, even when grossing up for taxes.

EPCRS doesn't address this cirucmstance. It does talk about amending the plan to permit hardships if one is made by mistake, but I can't find any reference to a circumstance of overpayment. But I have been known to miss a detail here and there.

Fortunately, there are many smart people who comment on this board!

[masteff]

Sorry, should have been more specific w/ my first question. There are a number of reasons a distribution might be not allowed. So I'm not asking what the trust co did that wasn't allowed but why specifically the funds aren't allowed to be w/drwn under the plan. Was it safe harbor company match? Was it QNEC funds? Etc. Understanding what type of funds were allowed to be incorrectly withdrawn may help someone figure out where to direct you on corrections.

[wsp]

The error was made by the trust company. They didn't check with us prior to making the distrbution. But they are supposed to have the same data as we do, but somehow distributed too much. They gave no reason, and how they did it does not concern me. We just need to fix it. And they need to not do this again.

It would be nice if we could use the extra amount for taxes. But the distribution can't exceed maximum distributable amount, even when grossing up for taxes.

EPCRS doesn't address this cirucmstance. It does talk about amending the plan to permit hardships if one is made by mistake, but I can't find any reference to a circumstance of overpayment. But I have been known to miss a detail here and there.

Fortunately, there are many smart people who comment on this board!

Count me as one of the not so smart ones. But, I'll toss a response in here anyways....To me, how they did it is very valid. If they had the right hardship available amount and still distributed too much then it's their responsibility to replace the funds. I suppose then we get into the windfall gains on behalf of the participant but I'm less worried about that then making sure the trust is whole and that there are no others who have the wrong amount being stored in the hardship available fields. Otherwise the whole "not do it again" directive is pretty pointless as they will do so.