Hardship Distribution

[rblum50]

I was just told by the investment advisor on a 401(k) plan, that our mutual client (without first consulting me), distributed $6,000 from their 401(k) plan to a plan participant in the form of a hardship distribtion. The plan only allows for hardship distributions in the amount of accumulated salary deferrals without earnings. Given this fact, the maximum allowable distribution should have been in the range of about $4,500. This excess distribution was made at the beginning of this month.

What are the implications of this excess distribution to the plan?

What are the implications to the participant?

What is the best way to correct this problem?

[masteff]

Did the participant have a loan as might generally be required prior to a hardship and could they have merely failed to properly fill out both sets of paperwork and you could now fix that by characterizing $1500 as a loan and setting up loan payments (as it was this month, you're not even late for starting payments)?

[Guest Matthew Gouaux]

This is a qualification problem, but one that can be corrected. There are at least two alternatives to consider:

First, you may be able to correct via retroactive plan amendment if the participant's account included amounts other than salary deferrals. The rule under the 401(k) regulations which prohibits hardship distributions of earnings on salary deferrals does not apply to profit-sharing contributions (other regulations do apply, and you would need to consider those to determine whether an amendment would be permissible on your facts). Also consider whether the employee who received the distribution is a HCE or NHCE and whether the amendment would implicate current/effective availability rules under the benefits, rights and features regulations.

Second, you could treat the impermissible portion of the distribution as an overpayment and correct as described in EPCRS (Rev. Proc. 2008-50), that is, attempt to recover the distribution plus interest from the participant, and contribute any uncollected amount, adjusted for earnings, to a plan suspense account to be used as to offset future employer contributions.

[Tom Poje]

basically the folowing repeats what was said, but see also #10 IRS fix it guide. a nice handy chart to have handy

http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf#page=2

[rblum50]

Did the participant have a loan as might generally be required prior to a hardship and could they have merely failed to properly fill out both sets of paperwork and you could now fix that by characterizing $1500 as a loan and setting up loan payments (as it was this month, you're not even late for starting payments)?

Loans aren't allowed in this plan