Can a plan administrator allow a hardship withdrawal without requiring

[KIP KRAUS]

Two questions regarding hardship withdrawals under the safe harbor withdrawal provisions.

One: Can the administrator, in his sole discretion allow a hardship withdrawal without requiring the participant to first exhaust his plan loan options? Any precedent?

Two: If the plan forgot to stop employee voluntary payroll deductions when the hardship check was issued how should this be rectified? The participant received the distribution in December 1999, the end of the 99 plan year, and is still contributing. Can we stop contributions now and start the 12-month period? Any precedent?

[MWeddell]

Replying to your first question, the answer is no. Regardless of whether one is using the safe harbor resources test or the general resources test, the participant must first take any nontaxable loans available to him or her under the plan before being eligible to take a hardship.

The only escape I've heard of is that under DOL loan regulations the loan can be denied if at the time of the loan the plan administrator has reason to believe that the participant does not intend to repay the loan. If you think about it, that's hard to do because most plans typically require an irrevocable consent to payroll deductions for loan repayment so how can the plan administrator know that the loan won't be repaid?

[LCARUSI]

MWeddell -

Must the participant take the maximum allowable loan? What if the loan repayment would constitute an inordinately large percentage of the participant's net pay?

[MWeddell]

No, the participant doesn't have to take the maximum loan amount available. Suppose that a plan allows only 1 loan per participant. A participant may take a $1,000 loan on day 1 (or whatever the plan's mininum loan amount is) and then on Day 2 apply for the hardship withdrawal pointing out that there are no nontaxable loans available to the participant under the plan. I think that is allowed. I suppose that others might demand that the participant repay the first loan and take out a larger loan, but I wouldn't be such a stickler.

Moving to LCarusi's second question, if the loan is so high or the participant's situation so dire that taking the loan would increase the participant's hardship need, then the hardship withdrawal may be granted even though the participant hasn't taken a loan. (Good catch; I should have remembered this exception in my first posting.) See Treas. Reg. 1.401(k)-1(d)(2)(iii)(B)(flush language at provision's end). However, I'd advise a client that the participant must supply some documentation to support this assertion before granting the hardship withdrawal without the loan and not just take a verbal "I can't afford it" as the reason for not requiring that the loan be taken first.

[KIP KRAUS]

MWedell:

Thanks for your answer to my first question. I thought as much, but couldn't find a difinate answer.

Any body want to tackle my second question?

[Guest carolneill]

Two: We have advised plan sponsors to stop deferrals as soon as they realized that deferrals had not been stopped and not allow them for 12 months. We also have them put something in the file stating when they discovered the error and when they stopped deferrals.

[actuarysmith]

We have had this situation come up as well. In some cases, the participant has had a history of multiple loans, or previsous defaults, etc.

In these cases, we have taken the view that the participant is not creditworthy to take a new loan, and have granted the HS W/D immediately instead.

[Guest]

As to part 2, I think the easiest thing would be to do what you suggest.

[IRC401]

If the plan has a requirement for spousal consent for a loan, get the spouse to sign a letter that she refuses to consent.

[Guest]

for continuing deferrals after hardship see Q & A 110 under the correcting plan defects Q & A bulletin board.

basically APRSC, return $ to participant to ' restore things as if violation hadn't occurred'

this Q & A gives the logic, reasoning, etc for following this procedure.

obviously there might be other ways, but check it out.

[R. Butler]

For part 2 of the question, we have always handled it in the same manner that Mr. Poje suggests. Return the deferrals plus any earnings to the participant.