Terminated Plan-Participant has Hardhsip

[Dougsbpc]

We administer a 401(k) plan that terminated three months ago and will be submitted to the IRS next month for a DL.

A participant called and needed a hardship distribution.

Generally, when a plan is terminated and waiting for a DL, we have not been allowing any benefit distributions until all benefits are paid at one time after receiving the favorable determination letter.

Has anyone ever considered allowing a hardship withdrawal after a plan has terminated prior to receiving a determination letter?

Thanks.

[JanetM]

Does plan have hardship withdrawal? Is it safe harbor? If so, and you follow the plan, why not. Seems funny logic, you freeze all activity waiting for DL. Why? You start new plan you have all kinds of stuff going on while waiting for DL to arrive.

[QDROphile]

Why did the plan terminate? Are all participants eligible for distribution, but for the plam termination (e.g. termination of employment). Was the plan amended to restrict distributions pending receipt of a determination letter? Seems like someone should give a hard look at what the plan terms say about distribution.

[Dougsbpc]

Thanks for the replies.

The plan terminated in preparation of the sale of the company. At the last minute the deal fell through so the company is stuck with a terminated 401(k) plan. All participants are still employed. The employer wishes they hadnt terminated the plan but it is too late now.

The plan allows for harship withdrawals provided at least one of the conditions are met. It is safe harbor so this participant must obtain a participant loan first.

Certainly a terminated plan can condition the distribution of all benefits to receiving a favorable determination letter. We have permitted very small plans to distribute all benefits before receiving a DL but think it may be a bad idea for larger plans. Consider a 50 participant 401(k) plan. Although it is very unlikely, think about how difficult it would be moving distributed benefits back to the plan in the event the IRS would allow retroactive correction of some plan defect it may have uncovered. Or if the plan were disqualified participants who rolled over benefits would be assessed a 6% penalty. Again, this is unlikely but is a reason to condition the distribution of benefits to receiving a FDL.

However, this would not apply to a harship distribution and perhaps the participant could be given the hardship distribution even though the plan is terminated.

[QDROphile]

I have not seen anything that would cause the plan to be administered pending mazss distribution in a way that is different from how the plan has always been administered, except the plan should be amended to eliminate the requirement for a loan before hardship. I think the concerns about the determination letter are misplaced with respect to distributions in the regular course pending the mass distribution on account of termination. If some error were discovered, those distributions would have to be corrected whether or not there is a termination. Having a viable plan sponsor makes a lot of difference.

But all this must be decided in the larger context of what the employer is going to do about a retirement plan for its employees. Some better thinking ought to be applied to that issue first.

[Jim Chad]

My question for everyone is: When is the process of terminating a Plan beyond stopping?

If no one has been paid out, can't you start allowing deferrals, etc.?

Would anything need to be done with the final Determination letter or could you just put it on a shelf and ignore it?

[Bird]

My question for everyone is: When is the process of terminating a Plan beyond stopping?

Good question. From what I understand about this case, I don't think it's too late to adopt a resolution rescinding the termination. You might even be able to tell the IRS "never mind" on the termination submission; if not, yes, I think you could just put it on a shelf.

On the original question, if you go ahead with the termination, I see no reason to not process a hardship withdrawal. I agree that it's best to wait for the DL to process regular plan termination distributions, but this (hardship) is different.

[david rigby]

Some prior discussion about the concept of "un-terminating" a plan.

http://benefitslink.com/boards/index.php?showtopic=8785

[Dougsbpc]

Interesting. It sure makes sense that you should be able to resume the plan as long as no benefits have been distributed and participants are made 100% vested.