Conflict b/w hardship withdrawal rules and ESPP rules

[Flight33]

Under the 401(k) regs, an employee who takes a hardship withdrawal may not contribute to any other plan of his/her employer for 6 months following the withdrawal. But, under Section 423's universal availability rules, all employees must be able to participate in a company's ESPP (with certain exceptions).

So, if an employee take a hardship withdrawal on a 401(k) plan and then cannot participate equally his/her employer's ESPP for 6 months, does that violate the ESPP's universal availability requirements?

I'm assuming that Congress wouldn't set up a safe harbor for 401(k) hardship withdrawals that would directly conflict with another code section (i.e., 423). But does anybody know of any authority on this issue that essentially says that complying with 401(k)'s hardship withdrawal safe harbor does not result in a violation of 423's universal availability requirement?

Thanks in advance.

[JanetM]

You assume too much. Congress screws up all the time, that's why we have technical correction bills so often.

I would interpret the rules to be on all plans, 423 included. I don't see it violating universal availability, after all no one forces one to take a hardship. So you can choose to participate or not in the plan, by taking hardship you are electing to stop participating for 6 months as condition for getting hardship.

[masteff]

Treasury specifically listed stock purchase plans in Reg Sec 1.401(k)-1(d)(3)(iv)(F): "the phrase plans maintained by the employer also includes a stock option, stock purchase, or similar plan maintained by the employer".

And this sample Georgia Pacific ESPP document specifically addresses that hardship w/drwls from the 401(k) plan result in suspension. Same w/ this one from ServiceMaster.

[QDROphile]

The regulations do not require a six month suspension. If you don't like the conflict, amend the 401(k) plan.

[JanetM]

QRRO, I thought that only applied to Katrina announcement 2005-70.

[masteff]

QDRO's point is that Reg Sec 1.401(k)-1(d)(3)(iv)(E) is entitled: "Distribution deemed necessary to satisfy immediate and heavy financial need". That word "deemed" makes it technically a safe harbor provision.

And indeed, part (a) of Sec 636 of EGTRRA which changed the suspension to 6 months is entitled "Safe Harbor Relief", confirming that it's viewed as a safe harbor provision and not a mandatory one.

Of course going outside of safe harbor is done at one's own discretion (hopefully w/ advice from ERISA counsel).

[JanetM]

Thanks masteff. Since all our plans stick to safe harbor I suppose I didn't realize it wan't mandate for all.

[masteff]

To be honest I hadn't really made that nuiance until QDROphile had made a similar statement some months ago and caused me to become curious about it.

Just thinking aloud, going back to the original post, a review of the 401(k) plan text would be very important to determine what it says about the suspension and it's application to other plans of the company. For instance, if the 401(k) doc didn't say "all other plans", then it technically would not apply to the ESPP. (This would be a case where the plan could be slightly less than full safe harbor.)