Hardships not permitted after Age 59 1/2?

[Below Ground]

Perhaps I missed a change in the law. Received a letter from a representative of a major "fund house" which says: "If the plan allows for In-service Distributions and the person is over age 59 1/2, we will have to follow the IRS guidelines and process as an In-service Distribution rather then a Hardship; meaning the mandatory 20% federal withholding would apply."

I missed something because I know of no IRS guideline that says there is a maximum age for Hardships, or a guideline that says a post 59 1/2 Distribution must be an In-Service Distributions, not a Hardship. So funeral expenses for a spouse of such person would not be qualified as a Hardship????

Is this right? If it is, please identify where I might find these IRS guidelines.

[Lou S.]

If using the IRS safe-harbor hardship rules I think this is correct because you have to exhuast all other avenues of receiving funds before requesting a hardship and the participant has access to funds w/o requiring a hardship though the in-service feature.

On the plus side you don't have the 6 months suspension of deferrals for in-service that you have hardship.

[My 2 cents]

Wouldn't taxation of a post-59 1/2 withdrawal be just ordinary income, under whatever circumstances led to the amount being paid, with no excise tax being due for a premature distribution?

Always remember that taxes have to be paid on the withdrawal! If the 20% mandatory withholding is too big, you can get money back when you file next year. If it is too small, you have to pay the remainder due as taxes. If it is way too small, be prepared to write out a big check come April 15th (and hope that you don't owe a penalty tax for not having prepaid enough taxes)! Granted that the withholding may require taking a bit more out than if there were no withholding, but just because it was a hardship withdrawal does not spare you having to treat the entire amount as taxable. The withholding prevents a big surprise next year.

Note that if the plan does not allow in-service withdrawals, the fund house should not block a hardship withdrawal.

[Bri]

Agreed - I've got a profit sharing plan that allows in-service after 5 years of participation. Folks would take hardship distributions for their kids' college expenses. Then suddently when they hit 5 years of participation, they were subject to the 20% mandatory withholding, which caught them by surprise, since they could elect out of withholding on hardships.

-bri

[My 2 cents]

Being able to elect out of withholding does not keep the withdrawal from being fully taxable, the difference being that all of the amount due must be raised and paid the following April, since there would not have been any taxes already paid on the withdrawal. Is that advantageous? I don't get it.

Naturally, all hardship withdrawals will be reported to the IRS by the plan on 1099-R forms, so not reporting the distribution and paying taxes on it is not an option.

[Below Ground]

So this is correct, you can't take a Hardship since you must first exhaust other types of distributions first?

To My 2 Cents. Of course it will be taxable either way. The concern is on how much money does the person get in hand right now. Looking long term, you are 100% right. No difference. Short term there is definitely a difference. If person needs $1,000 right now, then getting $800 is not enough. We all know that people frequently don't make the best choices, and when you tell them that they can't have what they want, a huge tantrum may follow. If I have to say no, I want to be sure that is the correct answer.

[John Feldt ERPA CPC QPA]

Roll it to an IRA. Withdraw it all from the IRA and elect no withholding. No tantrum.

[John Feldt ERPA CPC QPA]

Actually, the tantrum is later when taxes are due.

[Lou S.]

Actually, the tantrum is later when taxes are due.

Every year we get 1 or 2 who take hardships, elect no withholding and then come April the following year are calling up asking to take a hardship to pay thier taxes. It is funny that you are allowed to take a bigger hardship to cover the taxes at the time of the hardship but not allowed to take a hardship to pay the taxes later under the safe harbor rules.

[Below Ground]

Both suggestion are good ideas, normally. I am talking about a person who want his/her total deferral account (hardship is big enough, and earnings not involved), who looked at the value of his/her account and thinks they can get that. They whine about no earnings, and then explode over the 20%! Isn't "funny" that a person with $1299.57 in his/her account will scream about every little things while a person with $250K takes it all in stride. Come to think of it, it makes perfect sense!

[My 2 cents]

Both suggestion are good ideas, normally. I am talking about a person who want his/her total deferral account (hardship is big enough, and earnings not involved), who looked at the value of his/her account and thinks they can get that. They whine about no earnings, and then explode over the 20%! Isn't "funny" that a person with $1299.57 in his/her account will scream about every little things while a person with $250K takes it all in stride. Come to think of it, it makes perfect sense!

Yup. Having money often makes it easier to deal with adversity.

[BG5150]

If using the IRS safe-harbor hardship rules I think this is correct because you have to exhuast all other avenues of receiving funds before requesting a hardship and the participant has access to funds w/o requiring a hardship though the in-service feature.

On the plus side you don't have the 6 months suspension of deferrals for in-service that you have hardship.

This should also be the case if the plan allows for distribution of rollover amounts at any time. (And of course, if the participant has rollvoer funds...)

[Bill Presson]

The inservice allows access (typically) to more funds than the hardship anyway. The participant can access earnings on deferrals and employer money, so I'm not buying the withholding being a real issue.

[Below Ground]

Whether this issue has any validity would depend upon what the person has in their account. Losses could make cost basis more than account value so using earnings would not be a benefit. Of course their is no employer contribution then being able to access those monies would have no impact, since they don't exist. So when dealing with a low value account, withholding could perhaps be an issue? I do note that the value was small earlier.

[My 2 cents]

Whether this issue has any validity would depend upon what the person has in their account. Losses could make cost basis more than account value so using earnings would not be a benefit. Of course their is no employer contribution then being able to access those monies would have no impact, since they don't exist. So when dealing with a low value account, withholding could perhaps be an issue? I do note that the value was small earlier.

I had been presuming that this was a 401(k) plan, or at least a profit sharing plan. As there would (presumably) be no post-tax money that had been contributed by the participant to the participant's account, wouldn't the cost basis be $0?

[Belgarath]

BG - to answer your original question, the reference you are looking for is 1.401(k)-1(d)(3)(iv)(E)(1).