hardships not eligible for rollover

[Guest sbavely]

I am preparing a letter to communicate the changes imposed by IRSERA '98 on hardship distributions. Unfortunately, information is scarce and contradictory from my sources. Therefore, I would appreciate any corrections to information that I provide and answers to my questions. I understand that only the elective deferral portion (excluding earnings on the elective deferrals, employer contribution sources and rollover/transfer accounts) is no longer eligible for rollover beginning 1/1/99, and therefore, exempt from the 20% withholding requirement of the Unemployment Compensation Amendments of 1992. Should 10% be withheld ? Should the hardship withdrawal form include an election to waive or decrease the withholding? Last, any suggestions for sources of information?

[MWeddell]

I think the hard part is figuring out what exactly is no longer an eligible rollover contribution. The IRS hasn't issued any guidance to help us interpret this and the provision becomes effective 1/1/99, so we'll have to make our best guess. Tracking through IRC 402©(4)© to the cross references in IRC 401(k)(2)(B)(i)(IV) and IRC 402(e)(3), it looks like the best interpretation is that the new exclusion from the "eligible rollover distribution" definition only applies to qualified cash or deferred arrangements and salary reduction 403(B) arrangements. Hence, I think you're right that it excludes other contribution sources and, per the IRS regulations under 401(k), investment gains and elective deferrals after 12/31/88.

Last week the Joint Committee on Taxation released its General Explanation blue book, which seems to support a narrow reading of the exclusion to be limited to the stuff described in IRC 402(e)(3). The blue book isn't completely unambigious either.

For the portion that's not an eligible rollover distribution, it's clear that the withholding percentage is 10% (because this is a lump sum distribution) unless the participant elects not to have withholding. The plan must give advance notice to the participant of the right to elect not to have withholding. However, the plan doesn't need to give the participant any choices other than 0% or 10% withholding. See D-18 through D-27 of Treas. Reg. 31.3405-1 for more detailed information.

[Guest jbender]

Like sbravely, we are composing a letter to clients re: hardships not subject to withholding. Should something be added to the special tax notice explaining the details or has the IRS issued some language on it? Any help would be appreciated!

[Guest LRidley]

See IRS Notice 99-5 (click), released on 12/24/98, available on Benefits Link.

[This message has been edited by Dave Baker (edited 10-27-1999).]

[Guest cfer]

RE: Special Tax Notice. IRS Model notice doesn't cover later changes of non-rollover eligible payments. You may adapt to include others as we did (e.g., death benefits to non-spouse beneficiaries, and new hardship withdrawals of 401(k).

[Guest ChristineR]

I am trying to compile a list of 401(k) vendors and their response to the extension in the new hardship rules until 1-1-2000. If you wouldn't mind sharing who your firm is and when you are implementing the new hardship rules, I would appreciate it.

[Guest ralar]

What is the consensus on how to report hardship distributions on Form 1099-R after 12/31/99? Since hardship distributions coming from certain sources (i.e., elective deferrals and earnings) will not be eligible for rollovers, but hardship distributions coming from other sources (i.e., employer matching or profit sharing contributions, and earnings) will still be eligible for rollovers, should two 1099-R's be used (one to report rollovers and one to report other hardship distributions) or should only one be used? If only one is used, how is the hardship distribution reported?