I have a plan that in the document does not suspend 401(k) contributio

[Hoard1]

I have a Plan that in the document does not suspend 401(k) contributions for 12 months for employees who take hardship distributions? Is this permissable?

[Michael Devault]

I don't think so. Look at section 1.401(k)-1(d)(2)(iv)(B) of the income tax regulations. It's pretty clear that the plan must provide that elective deferrals cease for 12 months.

Hope this is of benefit to you.

[Hoard1]

I have been told that these are only the Safe Harbor Test for establishing financial need and that an Employer may ellect in their Plan Document not to use the Safe Harbor definition. Has any one else had experience with this?

[John A]

My understanding of this from previous threads on these message boards and from other research I've done is that there is a “needs” test (distribution is needed to meet the hardship) and an “events” test (event creating an immediate and heavy financial need). The plan can use a “safe harbor” standard for one and a “facts and circumstances” standard for the other. (Reg 1.401(k)-1(d)(2)(iii), 1.401(k)-1(d)(2)(iv) )

Suspension of 401(k) deferrals for 12 months is part of the safe harbor for the needs test. As long as the needs test is met through the "facts and circumstances" test (also called the general standard), you should be o.k. Be careful of the terminology. I have sometimes seen both tests referred to as the "needs" test.

That was a rather long way of saying that I agree with Hoard1.

However, if the safe harbor is not used, then the determination must be made with nondiscriminatory and objective standards set forth in the plan document. (Reg. 1.401(k)-1(d)(2)(i)). Check Reg 1.401(k)-1(d)(2)(iii)(B) for other rules pertaining to the "facts and circumstances" test or "general standard".

Also, be sure the plan document specifies how to handle the events test.

[QDROphile]

A plan does not have to use the safe harbor suspension. Abandoning the safe harbor requires more attention from the administrator, so the big systems don't like them and often people are told that the suspension is required by law. Not so.

[Guest Chains]

If you use the safe harbor method for determining financial need, then the 12 month suspension is required. Under this SH, you only look at the assets in the plan.

If the plan allows (and you use) the facts & circumstances method, NO suspension is required, however you have to look at assets outside the plan to determine if the P can only meet the hardship financial need by a distribution from the plan & not from outside sources.