Withholding on a hardship withdrawal

[R. Butler]

Participant, age 60, is taking a hardship withdrawal. No other in-service withdrawals are allowed under the plan. The financial insititution holding the assets is taking the position the 20% mandatory withholding applies because the participant is over 59 1/2. Thye cannot provide me with any cite to support that position.

It is my understanding that a hardship withdrawal is not subject to mandatory withholding. The participant's age is irrelevant. I son't see anything that says otherwise. Am I missing something?

Thanks in advance for any guidance.

[david rigby]

http://www.irs.gov/pub/irs-pdf/p575.pdf

Page 26 lists those types of distributions that are not eligible for rollover.

[masteff]

This is the way I would have interpretted it in my last position as 401(k) administrator...

I see it as split between the plan's rules and the IRS's rules. The plan only allows in-service distribution on event of a hardship. So for plan purposes, the employee has a hardship withdrawal. But for IRS purposes, age 59 1/2 is the earlier event. Reg 1.401(k)-1(d)(1)(ii) says "attainment of age 59 1/2 or the employee's hardship". Either is an acceptible event to permit the distribution of elective deferrals, so the earliest one counts first. So for the IRS, this is rollover eligible money and therefore subject to mandatory withholding rules.

[R. Butler]

Thank you for your replies. The financial institution backed off their position. They now agree that mandatory withholding not required.

[R. Butler]

This is the way I would have interpretted it in my last position as 401(k) administrator...

I see it as split between the plan's rules and the IRS's rules. The plan only allows in-service distribution on event of a hardship. So for plan purposes, the employee has a hardship withdrawal. But for IRS purposes, age 59 1/2 is the earlier event. Reg 1.401(k)-1(d)(1)(ii) says "attainment of age 59 1/2 or the employee's hardship". Either is an acceptible event to permit the distribution of elective deferrals, so the earliest one counts first. So for the IRS, this is rollover eligible money and therefore subject to mandatory withholding rules.

IRS Notice 2000-32 permits the plan to disregard the proposition you state, but that probably is the reason for the financial institution's initial stance. They never really gave me clarification.

Thanks again.

[Guest Kabert]

Back around 2001 or so, the rules were changed so that hardship distributions are no longer eligible rollover distributions. Look for that guidance -- I expect it also tells the withholding story. If not, I'd look at the 402 and 3405 regs.