Disallowing elective contributions from those with 401(k) withdrawals/

[Guest KOlsen]

I seem to recall that employers can prohibit employees with outstanding 401(k)loans and/or(?) who have taken hardship withdrawals from making additional elective contributions. Can anyone clarify when the elective contribution freeze can apply and where to find the legal/reg. provisions that allow employers to impose them?

[Guest Dook]

Employer cannot stop deferrals for any participant because they have taken a paricipant loan.

As for a hardship withdrawal, if the participant withdrew from their deferral account, and the plan is operating under the safe harbor rules, then the employer MUST stop the deferrals for a period of 12 months from the date of the withdrawal.

This rule falls under the satisfaction of financial need section of the safe harbor regs. 1.401(k)-1(d)(2)(iv)(A).

If the plan uses the facts and circumstances method for determining financial need, then the employer may rely on the employee's written representation that the need cannot be satisfied through a number of different sources, one being the cessation of elective deferrals.

[MWeddell]

I agree with Dook's posting in regard to hardship withdrawals.

There's no external law or regulations that addresses suspending employees from making elective deferrals when they take loans. That leaves it open to the plan sponsor. If the plan document (or written loan procedures incorporated by reference into the plan document) says that participants are suspended from making elective deferrals for 12 months (or whatever time period one chooses) upon taking a loan, then such a restriction should be valid.

The penultimate sentence of Treas. Reg. 1.401(k)-1(g)(4)(i) implies that such a restriction is valid (but employees so restricted must be included in the ADP test).

[This message has been edited by MWeddell (edited 10-07-1999).]

[Dowist]

DOL rules on loans say that loans must be available to all participants on a reasonably equivalent basis. I'm not sure how a suspension would fit with this requirement.