Restricting Comp for PS allocation due to hardship w/d?

[Guest Spock]

In designing a new 401(k) plan with a safe harbor hardship w/d option, the sponsor would like to discourage hardship withdrawals by making the compensation earned during the suspension period ineligible for the profit sharing contribution. I've not seen that before. Does anyone see a problem with that?

[rcline46]

Not a safe harbor definition under 414(s), leading to a 414(s) test. If he does not like hardships, then don't put them into the plan.

[401king]

Assuming the participant has exhausted all resources, and the bill must be paid, the sponsor isn't really doing anything to discourage the withdrawal. Seems more like a backdoor way of trying to save 50% of the profit sharing expense for employees that have a hardship.

If it's a sticking point for the sponsor, replace the profit sharing with a match and the problem is solved.

[masteff]

Not to mention that it's a potential administrative nightmare because no payroll system will accomodate that (without custom programming), meaning lots of manual calculations.

[QDROphile]

I would really love to know what the thinking is behind the proposition. I can clearly understand many points that got no thought -- primarily the point correctly made by 401king. However, the match is not a solution, even if the plan is a safe design plan harbor plan. Safe harbor design plans are also the product of not enough thought, both in the option itself and in the adoption by the plan sponsor. However, adoption of the safe harbor design is not as cynical as the proposition about modification of compensation.

[BG5150]

So, someone who was putting money into the plan all along needs the money and is penalized with half the profit sharing, whereas someone who isn't putting anything away at all get the full benefit? Something like that might not discourage hardships, but participation altogether.

[GMK]

If he does not like hardships, then don't put them into the plan.

rcline46 has given you your answer.

If the plan is intended to provide resources at retirement, then don't add stuff that detracts from that goal.