What are the rules for hardship distributions from profit sharing plan

[John A]

It is my understanding that plan documents can provide that profit sharing, nonqualified matching, and some (unrelated) rollover account balances can be part of a hardship distribution.

It also seems clear that there is no safe harbor for determining that the distribution is necessary to meet the hardship in this case, and so the plan sponsor would have to meet the facts-and-circumstances standard to determine if the amount was necessary to meet the need.

Could the plan document still use the safe harbor for determining that the participant has an immediate and heavy financial need (medical, residence, etc.?), or would this also need to use a facts-and-circumstances standard?

Are there any other considerations pertaining to hardship distributions from profit sharing, nonqualified matching and unrelated rollover accounts?

[KJohnson]

My understanding has always been that the (k) regs regarding hardship do not have anything to do with a hardship distribution from employer contributions in profit sharing or matching accounts.

I think that if you use safe harbor for both (k) and profit sharing/match accounts you would be okay. However, I think that profit sharing and match definition of hardship could be much broader.

I have seen some Plans limit hardship from match and profit sharing accounts to participants with 60 months of service or "seasoned" money of over two years. That way even if the IRS does not like your definition of hardship, you fall within another permitted "in-service" distribution option.

[This message has been edited by KJohnson (edited 12-06-1999).]

[MWeddell]

Revenue Ruling 71-224 is what permits hardship withdrawals from employer contributions not affected by the 401(k) regulations. The standard must be defined in the document (there's mention of this in the 411(d)(6) regulations as well) and not discriminate in favor of highly compensated employees.

[Guest Barnard Walsh]

In service withdrawals are permitted from profit sharing plans, if the employee has been a participant for at least 5 years or if the the employer's contributions have been held for at least two years in the plan.

"Hardship," as such, is a term which applies only to 401(k) contributions which may be withdrawn for "hardship" only. 401(k) contributions are made by Participants, who defer receiving compensation. Earnings on these pre-tax employee contributions cannot be withdrawn prior to termination.

To simplify the plan's provisions, a plan may allow monies (employer and employee contributions) to be withdrawn only for "hardship." Otherwise, there could be several ways to get different types of contributions out of plans by Participants still actively employed with the company.

[John A]

As I read Revenue Ruling 71-224, distributions from the profit sharing source could be made prior to the 2 year/5 year in-service withdrawal rules since "provision may be made in profit-sharing plans for accelerated distributions because of such hardship provided that the term “hardship” is defined, the rules with respect thereto are uniformly and consistently applied, and the distributable portion does not exceed the employee's vested interest."

The Rev. Rul. specifically refers to the fixed number of years requirement (which the IRS interpreted as meaning 2 years/ 5 years) and implies that distributions may be accelerated to less than this requirement for hardship.

Agree? Disagree?

[Mary Kay Foss]

The working rules for hardship withdrawals are found in the 401k regs. I've always associated hardship withdrawals with

401k plans only because 401k plans prohbit inservice withdrawals before age 59 1/2. I've never seen a plan other than a 401k that offered them.