Can a 401(k) plan be amended to change the requirements for hardship w

[Guest Tara Curran]

The original plan document required 5 years of service before a participant could withdraw up to 50% of his vested balance in employer contributions. The plan is being amended for other reasons, but has also changed the requirements for hardship withdrawals to 6 years of service which would make the participant fully vested. Does this amendment fall under the anti-cutback rules and disqualify the plan? Please provide cites for any answers, if possible.

[Guest svatty]

A 401(k) plan can amend a hardship provision to include more/additional requirements necessary to receive a hardship, or can simply amend the plan to prohibit such withdrawals in the future.

Reg 1.411(d)-4 Q&A 2(B)(2)(x)

[Alf]

Yes. 411(d)(6) is not a problem, but remember that amendments can't discriminate in favor of highly compensated people. Also, I believe that the availability of hardships is a right that must pass the requirements of code section 401(a)(4).

[KJohnson]

I thought service requirements as well as requiring a certain vesting percentage were disregarded for current availability?

1.401(a)(4)-4(B)(2)(ii)

[Guest JMLSON]

I agree with ALF. Since the client instituted a service requirement for hardships, they would need to demonstrate non-discrimination via the current and effective availability tests under 401(a)(4).

[Guest JMLSON]

Age and Service conditions are disregarded under 1.401(a)(4)-4(B)(2)(ii) for optional forms of benefit, NOT RIGHTS AND FEATURES. I believe that Hardship withdrawals are a right or feature of the plan and imposing a service requirement would make the hardship feature currently available to only those employees who meet the requirement, thus requiring testing. Does anyone disagree??

[KJohnson]

I see your distinction between a "right and feature" and an optional form of benefit under the 1.401(a)(4)-(4) regs and the age and service can only be disregarded for an optonal form of benefit.

However 1.401(a)(4)-4(B)(2)(ii)(B) regarding a condition based on a specified percentage of an employees accrued benefit being nonforetiable appears to apply to all rights and features. What if they simply specified that an employee must be 100% vested to receive a hardship.

[Alonzo]

A hardship distribution is an optional form of benefit, not an "other right or feature". Otherwise, there would have been no need for the exception in the 411(d)(6) rules allowing the elimination of hardship distributions.

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[KJohnson]

Also, see 1.411(d)-4 Q&A 1, (B)(2) Example 5 which idicates that an in-service distribution based on "heavy an immediate financial need" is an optional form of benefit.

[Guest svatty]

You would have no issues .... whether regarding 411(d)(6) or the "benefits rights and feature" testing because simply instituting a service requirement, although it impacts NHCEs / it also effects HCEs in the same proportion. Whether in practice HCEs stay for the service period and NCHEs do not, could possibly raise the issue, but in practice, as KJohnson stated, you could require the hardship from only 100% vested participants and this change would not be a benefits right and feature problem and thus, instituing a service period for hardships would also be acceptable. The IRS wouldn't care unless the facts were so egregrious (10 HCEs with service met and 500 NHCEs that will never stay long enough to take advantage of the withdrawal) to warrant this WAY sophisticated analysis ... and judging from the EP/EO auditors I've met, they wouldn't come close to this with a ten foot pole.