401(k) Withdrawals

[Guest Redchip]

I have been working with 403(B) plans and as far as I know the distribution rules are a little different. Could someone answer me the following ?

1. Is the mandatory 20% rule waived ?

2. If a participant requests a hardship w/d or an in-service w/d...what money can he/she take out ? Is it only Employee contributions and no accumulated interest ? Also, is it only post or pre 1989 contributions ?

Thanks for any help you can give me !

[MWeddell]

1) 20% withholding applies to all eligible rollover distributions, which includes most common withdrawals and distributions in the form of lump sum payments. One cannot waive that withholding. If a payment is not an eligible rollover distribution, the amount of withholding varies depending whether the payment is periodic or nonperiodic and the participant has the right to waive withholding.

2) One cannot take a hardship withdrawal of investment gains after 12/31/88. (This date might vary by up to six months for plans that didn't have calendar plan years.) One also cannot take a hardship withdrawal of "qualified" contributions designed to meet safe harbor contribution requirements or to improve ADP / ACP tests. Any other type of contribution has hardship withdrawal options to the extent specified in the plan document. There are regulations addressing hardship withdrawal of elective deferrals, which include several different options, which often are also used to defined what constitutes a hardship for plans that allow other types of contributions to be withdrawn due to hardships.

[Guest Redchip]

Thank you for responding!

I was under the assumption that with some new rule changes(eligible Rollover ?) concerning 401(k) Hardship W/D's, you can waive the 20% withholding. I am a little confused.

[Guest T Hoffman]

The Internal Revenue Service Restructuring and Reform Act of 1998 provides that, for plan years beginning after December 31, 1998, hardship distributions made from a Code Section 401(k) plan are no longer eligible rollover distributions.

Weddell is correct that hardship withdrawals that are not eligible rollover distributions (see transition relief rules below) will be subject to the general withholding rules of Code Section 3405(a) for periodic payments or Code Section 3405(B) for nonperiodic distributions. Code section 3405(e)(3) defines "nonperiodic distribution" for purposes of the Code section 3405 withholding rules as any designated distribution which is not a periodic payment. A periodic payment is a distribution under an annuity contract or similar arrangement and is one of a series of payments payable over a period greater than one year and taxed as an annuity under Code section 72. The payee of a nonperiodic distribution may elect out of withholding.

The IRS has issued transition relief that allows both Code Section 401(a) plans and Code Section 403(B) plans to delay implementation of the exception as it applies to distributions occurring before January 1, 2000. Therefore, for distributions during calendar year 1999, the IRS will allow any distribution that would have qualified as an eligible rollover distribution under the Code Section 402©(4) definition immediately prior to its amendment to be treated as an eligible rollover distribution for all purposes under the Code. However, a qualified plan or Code Section 403(B) annuity is permitted to determine the amount of any eligible rollover distribution in 1999 by using the Code Section 402©(4) definition, as amended by RRA '98. Finally, the IRS has provided that the use of the amended ERD definition by a Code Section 401(a) or 403(B) plan in 1999 will not affect the eligibility of a distributee to determine the portion of the distribution that is an eligible rollover distribution using the definition in effect prior to RRA '98.

Although hardship distributions are not subject to the 20% withholding rule, the 10% early withdrawal penalty tax may still apply.

[QDROphile]

Be careful about using "hardship distributions" as synonyms for "elective deferrals." A plan can be designed to allow distributions (including related earnings) on account of hardship from sources other than elective deferrals. If so, then different rules apply to the different types of monies because the new rule only excludes in-service distributions of elective deferrals from the definition of "eligible rollover distribution."