Harship Distributions: safe harbor requirement for employee to obtain "all other currently available distributions"

[Guest BL333]

Under 1.401(k)-1(d)(3)(iv)(E) a distribution is deemed necessary to satisfy an immediate and heavy financial need if "the employee has obtained all other currently available distributions..." and is prohibited from making elective contributions for the following 6 months.

Does anyone see a problem with structuring a plan to provide that a participant may not take an in-service withdrawal from his or her profit-sharing account until he or she takes any available 401(k) hardship withdrawal? In some ways this seems to be drafting around the 401(k) rule that provides that other distributions (like profit-sharing distributions) should come first. However, the 401(k) rules say that all other "currently available" distributions must be taken first - so if the plan doesn't permit profit-sharing withdrawals before 401(k) withdrawals, then the profit-sharing withdrawal isn't "currently available" when the participant is seeking a 401(k) hardship withdrawal.

Any thoughts or links to guidance would be greatly appreciated. I didn't see any PLRs on point, but if someone knows of one, I would love to have the cite.

Many thanks!

[WDIK]

Other than the 20% mandatory withholding issue, are there other practical differences between in-service and hardship distributions?

[Guest BL333]

No big differences. The employer is just very focused on protecting its employees' profit sharing contributions. The current plan doesn't allow for any in-service distributions from a participant's profit-sharing account, but given the economic climent (and the related needs of participants), the employer is considering amending the plan to allow for in-service profit sharing distributions but would like to allow such distributions only after a participant has exhausted any 401(k) hardship withdrawals.

[WDIK]

The employer is just very focused on protecting its employees' profit sharing contributions.

the employer is considering amending the plan to allow for in-service profit sharing distributions

I don't mean to come across as being difficult, but to me the employer's objectives seem inconsistent. I don't know if the desired structuring would pass IRS muster or not, but I suspect that it goes against the intent of the cited regulations. I would think it would be more cost-effective to try and change the employer's perception of the situation.

[masteff]

Other ideas to consider.... 1) limit the number of PS w/drwls allowed in a year, 2) limit the amount available for PS w/drawals (such as up to 50% of the PS balance on date of w/drwl), and 3) nothing I know of to prevent you from using "hardship" type restrictions on PS money as well (we had a plan that did this w/ a coupld of less restrictive w/drwl reasons for PS money; we tended to refer to "plan hardship" vs "IRS hardship" to denote the difference between PS and deferral monies).

[Guest Sieve]

WDIK -- Another difference between in-service & hardship distributions (inherent in the applicability of the 20% mandatory withholding to the in-service and not the hardship) is that a hardship distribution cannot be rolled over (& an in-service can be).

[WDIK]

True, but that point did not seem applicable to this situation where getting cash in hand seems to be the issue.