hardship eligible --

[Guest SoftballQueen]

This was posed by an advisor to me:

Participant has been out for about four months after having had open heart surgery. He will probably not return to work until March of next year. He has medical bills and tuition for his daughter that he is behind on payment. Does he still have to request a loan from his 401K even though he may not return to work for some time. Will he accrue interest on his loan until he returns to work? In this instance can he opt for a hardship withdrawal instead?

My answer is that he is not eligible for either a loan nor a hardship b/c both are "in-service" requests and he is currently not being paid by the company.

[ESOP Guy]

Am I understanding your position correctly? In your mind this person can't take a hardship because they aren't "in-service" but what can't take a regular distribution because they aren't terminated either?

If I understand your position correctly I would want to know what you think this person's status is? I think you need to see how the plan defines "in-service".

[Guest SoftballQueen]

The person is out on medical leave and is not receiving direct compensation from the company. This person is 51 years old so in-service at 59 1/2 is not an option. My thinking is if he isn't compensated from the company directly (he is being paid by outside disability insurance); he isn't performing services for the employer = no hours worked. My thought is on the same lines with taking a loan. He would be ineligible to take a loan b/c he has no compensation for payroll deductions which is how the plan is set up only to accept payroll deductions for loans. Loan considered in-service withdrawal. Applying the same logic to the hardships. Am I missing something that may have changed in the past few years.

[BG5150]

Does the document have anything on leave of absence?

[masteff]

Per the regs, a plan loan is not required for a hardship distribution if it would increase the need of the participant. Arguably, being on a medical leave of absence with no pay, the loan would increase the current hardship. Search on the word "counterproductive" here to find the relevant piece: http://www.ecfr.gov/cgi-bin/text-idx?node=26:5.0.1.1.1.0.2.78&rgn=div8 However the plan may be stricter than the regs, so consult your plan document. Also review your plan's loan rules.

And as the others have noted, I hope you've now spent time carefully reading the plan's definitions sections for a whole variety of words like: employee, employment, service, participant, leave, and termination. And then carefully read the plan section addressing hardship withdrawals crossreferencing to the plan definitions you just reviewed.

[GMK]

Unless your plan document says otherwise, an in-service distribution is one that a participant is allowed to take before terminating employment, that is, while the participant is still an employee of the company sponsoring the plan. This is in contrast to distributions that are available after separation from service.

How does the company view Mr. heart surgery's employment status? Have they notified the payroll department of his termination change of status? Have they sent him a COBRA notice? If he walked in and started working, would they pay him or escort him out because he is not an employee anymore?

You may be able to prevent the loan, based on the payroll only payback. (I don't know or care, I hate loans). But why can't he have his hardship distribution? He doesn't pay it back, right? and it appears from what you've posted that your plan document allows for hardship distributions prior to an employee's termination.