Salary Deferrals post hardship Distribution

[Dougsbpc]

A participant recently took a hardship distribution. A portion of the withdrawal was taken from his Salary Deferral benefit, and as such he is not allowed to make salary deferral contributions to his self directed account for 6 months following the date of the withdrawal.

Employer went ahead and deducted the contribution from his paycheck anyway. Do we let it slide or reimburse the participant?

Note: Sal-Def Contribution amount is approximately $75.00

[QDROphile]

Depends on the attittude of employer and the plan administrator about disqualifying operational failures. I would correct the mistake. Shame on someone for having a plan design with a six month suspension.

[masteff]

Was this merely the first paycheck following the withdrawal, such that it's really just a timing issue? Or did they continue taking it out of multiple paychecks?

If it's just the very first paycheck following the w/drwl, then I'd call it an issue of administrative convenience (ie the timing for the procedure of entering deferral changes into the payroll system). This is why I always tell people it can take 1 to 2 pay periods for changes to take effect even if I'm 99% certain it will be on the very next payroll. You start the 6 month clock from when you actually get the deduction shutoff.

If it was multiple paychecks then you need to return the deferrals. If it was all in 2012 then you can do it via the payroll system (just process a negative deduction)... or at least that's how I'd do it.

[Belgarath]

"Shame on someone for having a plan design with a six month suspension."

Huh? Sorry, I'm missing the point of this one?

[masteff]

"Shame on someone for having a plan design with a six month suspension."

Huh? Sorry, I'm missing the point of this one?

I took it as classic QDROphile dry humor

[QDROphile]

The six month suspension option is for the thoughtless.

[masteff]

The six month suspension option is for the thoughtless.

So are you suggesting instead that plans should have stayed on a longer suspension because longer suspension does more to discourage using retirement money for non-retirement purposes or are you in disagreement with suspension in general?

[Tom Poje]

some argue that the 6 month suspension refers to 'safe harbor guidelines' for hardships.

in otherwords, you could say no suspension.

Now, if you don't suspend deferrals, then how do you prove the hardship really exists? Oh I need the money for this and by the way, I can afford to continue to defer, someohow or other. arguablly then you didn't need the hardship or you took too much in hardship because you have leftover $ to continue to defer.

sort of like, under EPCRS the correction is this. if you follow those guidelines you are generally 'safe'. but if you turn around and say, well, I have a failed adp test, I'm going to correct this way instead of a one-to-one correction. If you get audited you probably won't have a leg to stand on.

Prototype plans are required to supend for 6 months.

[QDROphile]

"Prototype plans are required to supend for 6 months."

If you have a prototype plan, you are not required to have a thought. I suspect no thought about the six month suspension enters into a decison to adopt a prototype plan. Food for thought for the thoughtless.

With respect to the allusions to abuse, just because I need some extra funds today to pay tuition does not mean that I shoud be prevented from saving some amount out of my next pay check that could not have gone toward tuition anyway. That is punitive, not preventive.

[Dougsbpc]

Was this merely the first paycheck following the withdrawal, such that it's really just a timing issue? Or did they continue taking it out of multiple paychecks?

If it's just the very first paycheck following the w/drwl, then I'd call it an issue of administrative convenience (ie the timing for the procedure of entering deferral changes into the payroll system). This is why I always tell people it can take 1 to 2 pay periods for changes to take effect even if I'm 99% certain it will be on the very next payroll. You start the 6 month clock from when you actually get the deduction shutoff.

If it was multiple paychecks then you need to return the deferrals. If it was all in 2012 then you can do it via the payroll system (just process a negative deduction)... or at least that's how I'd do it.

Yes the deferral was made five days after the withdrawal took place. We caught it and reminded them to stop all contributions. Since the withdrawal and deferral dates were quite close, I'm hesitating having them withdraw and reimburse the contribution unless its necessary or could potentially cause problems.

[Tom Poje]

regardless, it is still a reminder.

1. If you have a prototype (not a big fan of them) you have to suspend for 6 months.

2. if you don't have a prototype

not suspending deferrals (assuming the document permits that) tosses you into non-safe harbor status.

would the IRS pursue the matter? don't know.

does that mean if you have 6 month suspension when you could have had a non safeharbor hardship you are 'thoughtless'?

At that point I would disagree.

[masteff]

Yes the deferral was made five days after the withdrawal took place. We caught it and reminded them to stop all contributions. Since the withdrawal and deferral dates were quite close, I'm hesitating having them withdraw and reimburse the contribution unless its necessary or could potentially cause problems.

Given that payrolls are generally run 3-5 days prior to the actual paydate, it's perfectly reasonable to not start the suspension until the following pay period given your fact pattern. Many corporations who get data electronically from their TPAs often only receive a file once a week or even less often; many of them would not have received this change in time. I'd worry that doing something retroactively on this would create an undesirable precedent about how quickly the company implements deferral changes in the payroll system.

[QDROphile]

There is guidance for making the financial need determination if the safe harbor is not used. I find it very comfortable as long as the administrator is willing to give a little thought to each application.

Apart from the rub with the prototype requirements, the big houses do not want to provide any individual attention (thought?) to applications, so they insist on the safe harbor. Now we can change our word play to "big house."

[QDROphile]

Thank you to masteff for trying to provide a constructive answer. Abstract criticism and anlaysis can be pretty easy and unhelpful.

[masteff]

I have fond memories from my previous job of sitting in a supervisor's cubicle or manager's officer and having conversations that bounced between "why the heck is our plan designed this way" and "so what do we do right now".

[Dougsbpc]

Yes the deferral was made five days after the withdrawal took place. We caught it and reminded them to stop all contributions. Since the withdrawal and deferral dates were quite close, I'm hesitating having them withdraw and reimburse the contribution unless its necessary or could potentially cause problems.

Given that payrolls are generally run 3-5 days prior to the actual paydate, it's perfectly reasonable to not start the suspension until the following pay period given your fact pattern. Many corporations who get data electronically from their TPAs often only receive a file once a week or even less often; many of them would not have received this change in time. I'd worry that doing something retroactively on this would create an undesirable precedent about how quickly the company implements deferral changes in the payroll system.

Thanks for input, masteff. We have decided to let it slide since it was merely 5 days after the withdrawal took place.