Hardship provisions...which do you use?

[Jim Chad]

I am starting to restate my Plans for EGTRRA and there are many things I am considering recommending my clients change in their documents.

In the past, if they wanted to allow hardship withdrawals, I always recommended the safe harbor.

Does anyone prefer the the other provision for Hardship withdrawal, and if so, what are your reasons?

Thank you in advance, to anyone who puts in time discussing this.

[QDROphile]

Very much against safe harbor.

Very little protection gained by it, except you can't administer in your sleep.

Nonsensical. Why should you be prevented from saving for six months simply because you tapped into the 401(k) for college tuition? At that point, it is just punitive.

Not that it should ever happen, but the provision messes up elective nonqualified deferred compensation as well, and can have an effect beyond six months because of the less flexible timing rules for deferrals.

I can't remember if it interferes with employee stock purchase plans, but check it out.

However, a lot of the big administration systems require it because of the belief that it allows the process to be automated.

[dmwe]

We only use safe harbors with our clients. Plan sponsors don't want to have to review facts and circumstances every time some runs into financial difficulties. The safe harbors are nice and specific and, yes, easier to administer. But business owners have plenty to keep them busy. IMHO, they don't need the extra burden of having to sit and listen to sob stories and then make the determination whether or not someone's financial difficulties qualifies as a hardship.

[QDROphile]

Just to keep the arguments straight, my understanding of the question relates only to the safe harbor and six month suspension of deferrals. Sob stories are not an element and the standards for determination of other resources are manageable. Determination of appropriate reason for distribution is another matter entirely and expansion on the list in the regulations opens an undesirable can of worms.

[Jim Chad]

Thanks to everyone for the input. Can I get the best of both worlds by not using safe harbor option in the adoption agreement, so I have all of the advantages mentioned by QDROphile. And have an administrative policy that looks a lot like the safe harbor events?

[QDROphile]

If you look at the regulations, you will see two essential conditions. One is an appropriate reason, the other is lack of other resources. I think you can address each condition separately, as do the regulations.

[austin3515]

Bear in mind that unless something has changed that I am not aware of, prototypes MUST use the safe harbor statndards for both events and needs with respect to 401k money.

[Jim Chad]

I'm going to a volume submitter for EGTRRA. But the Corbel nonstandardized GUST doc had both options for hardship.

[austin3515]

You can only use non-safe harbor for non-401k.

[RTK]

Just to emphasize QDROphile's comments.

There are two separate requirements for a hardship withdrawal under 401(k) regs: first, the financial need or reason for the withdrawal; and second, the extent to which there are other resources or assets to satisfy the financial need.

Each requirement can be addressed separately, and the safe harbor can be used for one or both requirements. The volume submitter I wrote in my prior life provided for those choices. Thus, at least in my VS, it would be possible to use the safe harbor for the financial need requirement so as not to have to make facts and circumstances determinations, while at the same time not to use the safe harbor for the other resources requirement so as to avoid the 6-month suspension rules.

In any case, whatever choice(s) is made should be set forth in the plan document. If you are willing to go the individual plan route, you could write your own expanded list of definite reasons for a hardship withdrawal. You may be able to do the same with a VS plan, but IRS agents react differently to variations from the VS document.

[Guest Sieve]

To austin3515: Do you mean that non-401(k) hardships cannot use safe-harbor hardship withdrawal provisions? If so, where did that come from?