Correction for Premature Hardship W/Drawal

[Christine Roberts]

401(k) Plan using safe harbor hardship withdrawal provisions allows participant to take hardship withdrawal to prevent foreclosure.

Validity of financial hardship is not in question however plan administrator approved withdrawal without first requiring participant to take out plan loan.

Maximum plan loan available would not alone have been sufficient in amount to prevent foreclosure but taking out maximum loan was not a "counterproductive action" as it might have been if employee needed hardship withdrawal to qualify for first mortgage. See Treas. Reg. 1.401(k)-1(d)(3)(iv)(D).

In such an instance what is the correction under VCP? (Plan must submit for other unrelated operational errors.) Does the sponsor have to back the employee out of the hardship distribution to the extent it could have been processed as a plan loan?

Isn't the more important task to simply demonstrate that the sponsor/administrator has procedures in place to prevent participants from "skipping" the step of taking out a plan loan to the extent doing so is not 'counterproductive'??

Any comments welcome.

[Jim Chad]

Could the employee realistically have been able to afford to make the payments on the loan?

You may want to look in your document to see if a loan was really required under these circumstances. I am fairluy certain that the regulations do not require a loan if the loan payments would add to the hardship.