Financial hardship exists (safe harbor definition) even if participant

[Guest hank]

Plan has safe harbor hardship withdrawal language. Issue: participant who desires hardship withdrawal has vested but unexercised stock options. Options are currently above water, and participant may take advantage of cashless exercise. Administrator's question: Does Reg. 1.401k-1(d)(2)(iv)(B) mean that the administrator must require the participant exercise his vested options (using the cashless exercise process, not cash) before the participant qualifies for a hardship distribution?

Has anyone encountered this situation before? If so, what did your plan administrator do?

[Guest hank]

Here's the approach we've now taken. If the unexercised option is above water at the time of the hardship request and can be exercised on a "cashless" basis, the participant will be asked to exercise the option before qualifying for a hardship distribution.

Anyone AT ALL want to react?

[Guest Bud]

Our approach is to see if the option above water and how much above water and how long it will take to exercise the options. If additional penalties or interest that would result from a delayed hardship distribution (because of the time involved with informing the participant to exercise, waiting for the cashless exercise to occur and reapply for a hardship on the difference) is greater than the equity in the options, we do not require the options to be exercised. In other words, if requiring the option exercise would have the effect of increasing the amount of need (which is the language in the hardship withdrawal Treasury Regulations), we do not require it.