How much can be taken out as a hardship distribution, after a particip

[Richard Anderson]

A participant has a deferral account balance of $6,000; $4,500 in deferral and $1,500 in earnings. He takes out a loan for $2,000.

Some time after the loan, he is eligible for a hardship distribution. Assuming that the account balance has not changed, how much can he take as a hardship distribution? The account now has $4,000 in other investments and the $2,000 loan balance.

Can he take the full $4,000? The $6,000 account balance less the $1,500 earnings, that must stay in the plan, equals $4,500.

Or, is he limited to $2,500? The $4,000 in other investments less the $1,500 in earnings.

I believe that he can take all $4,000 of the other investments. The $1,500 in deferral earnings that must stay in the plan is still there, invested in the loan note.

[LCARUSI]

I agree: $4,000

[MWeddell]

I also agree with $4,000, but check the plan document. If the document expressly said that the loan came from the participant's investment earnings first, then your answer should change.

[Richard Anderson]

Thanks for the responses. MWeddell, you state that the answer should change if the document states that the loan comes from earnings first. Could you explain. I don't see that changing the analysis. The earnings are still in the plan, only now invested in the loan note.

[SMB]

Is there an issue with regard to the loan collateral?

[MWeddell]

My last posting didn't make much sense. Sorry.

If the plan document made it clear that the loan first came from the CONTRIBUTIONS, then the plan now holds a $2,000 promissory note, $2,500 of elective deferrals, and $1,500 of investment gains on elective deferrals. The issue is ambigious, but in this situation one might consider that only $2,500 is available for the hardship withdrawal, not $4,000.