Hardship withdrawals - non-safe harbor definition

[Belgarath]

Situation - plan (not our document, but appears to be Sungard language/format) is currently a standardized 401(k). The definition of allowable hardship is the safe harbor definition.

Employer is selling corporation to two employees (husband and wife) in an asset sale. Part of the purchase price was to have come from a distribution from the plan. Since the soon-to-be new owners wish to assume the assets and liabilities of the plan and continue it, there is no severance of employment, so no distributable event. Neither is purchasing a business considered a safe-harbor hardship, nor are they 59-1/2 so they can't do an in-service of the deferrals.

Here's my question - if they amend the plan to a volume submitter and utilize a non-safe harbor hardship definition, and then make a determination that the purchase of a business (either by themselves or any other employee) constitutes an acceptable "hardship" do you see any problem with this? While admittedly self-serving, it seems to me to be the only way to simultaneously accomplish all their goals.

Would appreciate any thoughts.

[BG5150]

Is a loan not an option?

Is the bulk of the money K money, or employer money. You can have in-service withdrawals at almost any time of ER money (still subject to the 10% penalty tax).

Don't forget, with a Fact & Circumstances pattern, ALL resources reasonably available to the participant must be exhausted first. The EOB mentions a vacation home. I've read that brokerage accounts, boats not needed for work, and other investments are fair game.

From the EOB, the participant must put in writing that the hardship cannot be alleviated by:

(1) Reimbursement or compensation by insurance.
(2) Liquidation of the employee's assets.
(3) Cessation of elective deferrals or employee contributions under the plan.
(4) Other currently available distributions (including distribution of ESOP dividends under
IRC §404(k)) or nontaxable loans from plans maintained by the employer or any other
employer.
(5) Borrowing from commercial sources on reasonable commercial terms in an amount
sufficient to satisfy the need.

The written representation can't be relied upon if the employer has actual knowledge to the
contrary.

[masteff]

Do they have a prohibitted transaction issue if a plan distribution is used by a plan participant to become the plan sponsor? Especially if a plan fiduciary has to amend the plan and said fiduciary will directly benefit from the transaction?

[Belgarath]

$50,000 loan max isn't enough for what they need - hence this exercise. All (k) money - only employer contribution is safe harbor match. Assume that no other resources are available, for purposes of this discussion.

I'm not really concerned about the PT issue - although maybe I should be, it's a good question. But it seems to me that as long as the hardship distribution is a "legitimate" hardship under objective standards (I know, this is all facts and circumstances) that the PT issue goes away.

Thanks for the responses.

[movedon]

How is buying a business a hardship, even under facts and circumstances?

[BG5150]

How is buying a business a hardship, even under facts and circumstances?

You and I work for the company. It's owners want to sell. If they don't sell to you and me, they will sell to someone else and we might be out of a job.

(just a thought)

[cdavis25]

That seems to be a gray area and opens the door to some risk. I don't think the IRS would say that is a hardship. Who is to say they would be out of a job? That is an assumption not based on fact. What happens when another participant wants to do something similar? Who makes that call?

Why not just termiate the other Plan? That seems like the conservative approach.

[Belgarath]

As it so happens, later yesterday after posting the initial question, it turns out that they didn't initially give me all the appropriate information onthe corporate transactions, timing, additional plans, etc., etc... In fact, they left out almost everything! (Sound familiar?) Suffice it to say that all this turns out to be meaningless, and the plan will be terminated for other reasons. Not worth going into all the details.

Thanks for your previous thoughts on this.