Safe Harbor Hardship Distribution and 409A

[Randy Watson]

The safe harbor standards require that the recipient of a hardship distribution be prohibited from making deferrals to the plan and all other plans for 6 months. "All other plans" includes the employer's nonqualified deferred compensation plans. It is my understanding that 409A prohibits the suspension of deferrals once an election is made. Does this mean that employers with NQDC plans subject to 409A can't use the hardship safe harbors for their 401(k)?

[QDROphile]

See Treas. Reg, section 1.409A-3(j)(4)(viii).

[Randy Watson]

See Treas. Reg, section 1.409A-3(j)(4)(viii).

I can't believe I missed that. Thanks.

Since this section of the regs permits a cancellation (as opposed to a suspension), the service provider would be without deferrals under the NQDC for the remainder of that year, and possibly part of the following year. In the event the 6 month period spans two years, I don't see anything wrong with the service provider making an election prior to the next year to start deferrals at the end of the 6 month period. Do you? For example, assume the service provider takes a hardship under the 401(k) on September 30, 2009. The 6 month suspension would end April 1, 2010. Is there anything preventing the service provider from electing deferrals under the NQDC to commence on April 1, 2010 as long as that eleciton is made in 2009?

[QDROphile]

I agree with your proposition about an election effective for compensation after the expiration of the six months in the new year, but others disagree and would impose the moratorium for the reminder of the next year. I don't worry about it much because I think that those who use the six-month safe harbor deserve all the grief that may come their way.

[jpod]

I agree with QDRO. Plus, it must be some kind of goofy scenario in which a top-hat plan participant is so desparate that he or she needs to take (and pay taxes on) a 401k hardship w/d, then is able to afford NQ deferrals 6 months later.

[Just Me]

I agree with your proposition about an election effective for compensation after the expiration of the six months in the new year, but others disagree and would impose the moratorium for the reminder of the next year. I don't worry about it much because I think that those who use the six-month safe harbor deserve all the grief that may come their way.

I agree with QDROphile that an advance election can be made to re-start deferrals effective when the moratorium expires, as long as the election is made before the end of the prior calendar year. Those who disagree would be "safe" in their determination (no inappropriate deferrals), but I don't see this being a requirement. Don't forget that some executives save up amounts in NQDCs with the intention that they be used for educational expenses of their kids, so a HS W/D by someone who presumably is higher paid followed by a re-start of deferrals within six months would not be quirky. Not really a "hardship" as we know it....

[jpod]

Just Me: You're kidding, right? If I need $40,000 to pay for my kid's tuition/room and board, etc., you think I am better off taking a hardship of roughly $60,000 (more if I am younger than 59-1/2), rather than borrowing the money from a bank and paying it back as fast as possible with the money which I would otherwise defer into the NQ plan? (Use any dollar amounts you'd like, the concept is the same.)

[Degrand]

On ‎2‎/‎12‎/‎2008 at 9:36 AM, Randy Watson said:

The safe harbor standards require that the recipient of a hardship distribution be prohibited from making deferrals to the plan and all other plans for 6 months. "All other plans" includes the employer's nonqualified deferred compensation plans. It is my understanding that 409A prohibits the suspension of deferrals once an election is made. Does this mean that employers with NQDC plans subject to 409A can't use the hardship safe harbors for their 401(k)?

I keep looking at the regulations under 1.401(k)-1(d)(3)(iv)(E) and (F).  The "all other plans" definition is limited to (d)(3)(iv)(c)(4) and (E)(1).  It doesn't seem to apply to (E)(2) which is suspension rule. Even 1.409A-3(j)(4)(viii) says a plan may cancellation a deferral election.  Do we have to cancel nonqualified deferral?   

[dv13]

I have the same question as Degrand.

Is it a mandatory requirement that deferrals under a  nonqualified plan be cancelled due to the safe harbor standard of a 401(k) hardship distribution? The 401(k) rules indicate that deferrals under all plans of the employer must stop, but 1.409-3(j)(4)(viii) says ". . . a service provider's deferral election may canceled due to an unforeseeable emergency or hardship distribution pursuant to 1.401(k)-1(d)(3)."

[XTitan]

I've always looked at it as the 409A regulations permit NQ deferrals to be cancelled due to a 401(k) hardship distribution, but the 401(k) regs, but the 401(k) regulations require NQ deferral cancellation, so it's mandatory. 

It's not an issue next year since the Bipartisan Budget Act of 2018 (sec 41113) deleted the 6 month prohibition on contributions due to hardship.