Hardship Withdrawals Leading to Excess Match?

[Guest GmcyWT]

Plan has adopted safe harbor hardship withdrawal rules (including prohibition on making new employee contributions during the 6 months after taking a hardship withdrawal). Plan also provides for employer matching contributions - $ for $, up to 5% of Compensation.

Definition of Compensation does not exclude compensation earned by a participant during the 6-month suspension period after hardship withdrawal (i.e., Compensation would include compensation earned during the entire plan year -- even compensation earned (but prohibited from being contributed) during the 6-month suspension period). Thus, a participant who took a hardship distribution (and was barred from contributing for 6 months), but who contributed 10% during the remaining 6 months, could effectively receive a 10% matching contribution for the 6-month period during which employee contributions were permitted.

Assuming the employer is okay with this result, is there any problem here? Can/should Compensation exclude compensation earned during periods when a participant is prohibited from making employee contributions on account of a hardship withdrawal?

[Bill Presson]

Let's do the math.

A participant earns exactly $10,000 evenly throughout the year.

They take a hardship on January 1, so they are prohibited from deferring for the first 6 months of the year.

The last six months, they defer 10% of $5,000 or $500.

At the end of the year, they have earned $10,000 and deferred $500.

You do the true up calculationa and they get a 100% match of $500.

If this outlines what you are asking, I don't see a problem.

[Guest GmcyWT]

Yes, thanks -- that is the general outline. The twist seems to be whether the match should be limited to $250 (i.e., 5% of $5,000, which is the Compensation for the second half of the year during which deferrals were permitted).

TPA seems to think that only Compensation earned during the period in which deferrals were permitted (in this case, the second half of the year) should be used to determine the match. So the 5% limit should apply to the last six month's $5,000, rather than the $10,000 earned for the entire year. TPA's comments do not seem to be based on the plan document (which seems to permit the entire $10,000 to be taken into account), so hoping for leads/thoughts on anything that might require the first six months of Compensation to be excluded for purposes of determining the maximum match.

By way of background, Plan will be switching from annual match at year-end to per pay period match with annual true-up at year-end. TPA has suggested that they have encountered a lot of issues around matching with respect to participants who have taken a hardship withdrawal, so now looking for hardship-related pitfalls/issues to avoid... Have reviewed many posts/threads on per pay period matching issues, but no clear leads on this hardship-related issue.

[masteff]

Bill didn't exclude the 6 months of comp because there's nothing that generally requires that.

Put it back on the TPA to provide a citation from the plan doc or the IRS code and regs for why comp should be excluded during hardship suspension. Feel free to post it back here for us to help you evaluate.