Hardships

[Felicia]

Can the amount of the hardship required to satisfy the financial need include administrative fees charged by an administrator or vendor?

[Guest Sieve]

I'd say No. The regs permit you to include "any amount necessary to pay federal, state or local income taxes or penalties reasonably anticipated to result from the distribution". (Treas. Reg. Section 1.401(k)-1(d)(3)(iv)(A).) Although participants might not agree, I do not think administrative expenses are "penalties" (since they would apply, I assume, to any distribution), whether they be the expense of cutting a check or of calculating the account balance in a non-daily valued plan.

[K2retire]

Larry, what if the plan calls for all distribution fees (hardship or otherwise) to be deducted from the particpant's account?

[Guest Sieve]

If the fee reduces the remaining account balance, then it's not a distribution & is obviously ok. But, if it reduces the amount of the distribution itself, so that a subsequent 1099-R shows a hardship distribution of $5,075 but the actual cash distributed is just $5,000, then I don't think that falls within the parameters of a hardship distribution as described in the regs.

If the distribution is not on account of hardship, then there's no limitation on the use of the funds so that reducing the cash distribution (e.g., after age 59-1/2) is not problematic.

I'll bet it's done all the time, and maybe there's something I'm missing, and it certainly is a minor amount (in most instances). But it doesn't fit, in my mind.

[masteff]

But, if it reduces the amount of the distribution itself, so that a subsequent 1099-R shows a hardship distribution of $5,075 but the actual cash distributed is just $5,000, then I don't think that falls within the parameters of a hardship distribution as described in the regs.

You've just created a catch-22. The particpant can't take the withdrawal if the fee isn't paid but the fee can't be included in the withdrawal.

Clearly (at least to me) making the participant pay the fee outside of the withdrawal would be increasing the participant's hardship need. To use your numbers... was the participant's actual hardship need $5,075? if so then your withdrawal fails to fully address the participant's need and thus the hardship would continue to exist.

While grossing up the hardship need for the amount of the admin fees may not be 100% safe harbor, I would strongly argue that it is none-the-less necessary to properly address the hardship.

[jpod]

Sieve is correct: the extra $75 would not appear to qualify for a hardship distribution. But there is the easiest of solutions here, which Sieve already mentioned: the $75 can be paid from plan assets, more specifically the participant's account, assuming the plan by its terms provides for the payment of plan expenses with plan assets. This is unquestionably a plan expense, and if it is paid with plan assets it is not a "distribution," but it accomplishes the objective of paying the fee without decreasing the amount of the hardship distribution.

[BG5150]

Sieve is correct: the extra $75 would not appear to qualify for a hardship distribution. But there is the easiest of solutions here, which Sieve already mentioned: the $75 can be paid from plan assets, more specifically the participant's account, assuming the plan by its terms provides for the payment of plan expenses with plan assets. This is unquestionably a plan expense, and if it is paid with plan assets it is not a "distribution," but it accomplishes the objective of paying the fee without decreasing the amount of the hardship distribution.

But if you do that, you have to do it with everyone. You just can't say "Well, Jimmy really needs the money, so we'll take his fee from the forfeiture account, but I know Helen's husband makes a lot of money, so we'll just take her fee from her account." There should be an administrative procedure in place saying whether or not a fee will come from the participant or the plan.

[jpod]

BG5150: I agree with your observation. Also, note that if the $75 is paid with other plan assets beyond the amount distributed, the $75 is not taxable to the participant.

[Guest Sieve]

BG -- My assumption was that the charge of $x (for cutting the check, determining the value of the vested benefit, mailing, etc.) was paid by debiting the participant's account (NOT the plan, and NOT paid by the participant in a transaction outside of the plan). That's how it's generally done. Fewer & fewer plans are taking fees directly related to a specific participant transaction from the plan or its forfeiture account, but are charging them directly to the participant's account. And, we're not talking here about directly charging one participant's account for a distribution fee upon termination of employment and then charging the plan itself for the fees attributable to a partcipant taking a hardship distribution (although I have heard of some TPAs not charging at all for hardship distributions).

And, that normal fee debit would apply either to the distribution itself (thus reducing the cash distribution by $X) or to the remaining portion of the partcipant's account balance. If it happens that the distribution is a hardship distribution, then the $X should come from the remaining account balance and NOT reduce the cash distribution--or, if the participant wants to take the entire balance as a hardship distribution, you could only allow the maximum hardship distribution to equal the account balance minus $X (so that the fee would come from the remaining portion of the account rather than by reducing the cash in the hardship distribution).