Hardship Distribution

[Guest John Makarevich]

A question came up to regarding a hardship distribution. The participant already took a loan. The participant has cumulative deferrals of $7900. The 401(k) source account has $8400 in the plan, which includes a loan balance of $1700. The plan only allows hardships from the 401(k) contributions. Some of us said that the most he could take for a hardship is $6700 (8400 - 1700 loan balance). Others said he could take all of the $7900 because the loan is not a distribution. The arguement that the people who said he could only take $6700 is because when they liquidate the funds in the 401(k) source account he only has $6700, and that they couldn't take it from another source because that would could trigger an audit.

I couldn't find anything in the regs that said that the participant could not take the $7900, even if some of it is being distributed from another contribution source.

What is the correct answer?

John Mak

[austin3515]

The participant could take the full $7,900 if only it was available. But alas it is not...

The plan limits hardships to 401(k), so the story ends there.

If I think of it, I'll take the loan from a non-401(k) source for just that reason (i.e., so the particpant can still take the full hardship distribution).

Try this: refinance the loan to repay the 401(k) loan, and then turn around take a new loan from a different source. Yeah, I think that might work!! Rememeber, you need to reset the interest rate though! Also, double check the refinancing rules to make sure you're okay, but I think you will be.

[J Simmons]

Austin,

Is there some reason that on this fine summer Saturday your waxing whimsically? Is there some elixir that accounts for it, or just giddy over the return of your avatar?

Whatever your potion, it makes for a much more enjoyable read.

[austin3515]

I have an infant and a toddler, so it's not like my wife and I are gallavanting on the coast! Sometimes I have a spare minute or two, and with that I check out the boards, reads a quick NYTimes article or something like that!!

I always wanted an Avatar, and when I finally found this one I was really disappointed that it didn't show up... don't if I'd say I was giddy when it appeared, but it was pretty cool...

[Guest John Makarevich]

Since when has a loan become a distribution (since in this case it is not in default)? The loan is not a taxable event, it is merely another investment fund. Where in the regs does it say that the hardship is limited to that? The following is from the IRS website. Please tell me where it says that you reduce it by the amount of any loans.

"4. What is the maximum amount of elective contributions that can be distributed as a hardship distribution from a 401(k) plan?

The amount of elective contributions available for a hardship distribution cannot be more than the amount of the employee's total elective contributions, including designated Roth contributions, as of the date of distribution reduced by the amount of previous distributions of elective contributions. This "maximum distributable amount" generally does not include earnings, qualified nonelective contributions or qualified matching contributions, unless the plan provides that certain grandfathered amounts are included. Other amounts under the plan, if any, such as regular matching contributions and discretionary profit-sharing contributions may also be distributed on account of hardship if the plan so provides.

(Reg. §1.401(k)-1(d)(3)(ii))"

John Mak

[austin3515]

If you're looking for a section of the code/regs that will say "you cannot withdraw more money than you actually have" I can assure you it will be a fruitless search.

Your other sources are not eligible for hardship. It's as though they do not exist.

[Guest John Makarevich]

You missed my question.

When did the loan become a distribution?

Period.

John Mak

[austin3515]

When did anyone suggest that the loan became a distribution

Question Mark.

Let's say you had $10,000 in a checking account and you loaned your friend $3,000. What you're suggesting is that you should be able to withdraw $10,000 from the bank even though there is only $7,000 in your account. This analogy is dead on to your situation.

[John Feldt ERPA CPC QPA]

If there is enough actual money in the account, then the full hardship can be withdrawn (I also do not see how a loan balance can be distributed as a hardship distribution, no cash gets paid). But, be careful to see if your plan document unnecessarily limits the hardhip withdrawal to the 401(k) source account only. The regs limit the amount of hardship, not the source from which it is withdrawn. Does this help you with your question?

[masteff]

Since when has a loan become a distribution (since in this case it is not in default)? The loan is not a taxable event, it is merely another investment fund.

Um, no, on the investment fund thing. A loan is an asset, but it is not an investment. Here the problem is that it's not liquidatable for purposes of a distribution. Rather it's a reserve for what's receivable from the employee. If the employee terminated and cashed out today, would you give him cash for the loan balance? No, because there's no cash in it to give him. So how can you give a hardship out of it?

Your original post indicates he has other sources of money still existing in the plan. Austin's suggestion is the only valid one... find a way to reclassify the loan from the deferral source to another source.

Many plans with multiple sources of funds establish source heirarchies. Typically, loans come out in the opposite order of withdrawals. This allows the maximum amount available for withdrawal to still be in the account after the participant takes the loan.

Have you reviewed the plan doc to be sure there's not a heirachy stated which might allow you to reclass the loan source?