Correction for deferral made after hardship withdrawal

[BG5150]

We have someone who took a hardship in early October. He stopped his deferrals, but a deduction did come through for his year-end bonus.

What is the correction?

Someone here mentioned to just extend the suspension period one month. She said it was discussed (perhaps?) at the ASPPA EPCRS session.

Any specific guidance out there on this?

[Tom Poje]

cough * hack * blowing off the dust from my old notes*hack*wheeze**

can't hardly see....

dang it how did I end up saving so much stuff...(or even why).

(wowzers, I just noticed your post says 1999 posts, so your next one will be 2000)

1999 ASPPA Conference
46. A participant took a 401k hardship distribution pursuant to the hardship safe harbor rules, but was allowed to continue making 401k deferral contributions in violation of the 12-month suspension rule. What are the possible methods of correcting this error under APRSC?
Start a full 12-month suspension when the error is discovered?
Distribute impermissible deferrals and earnings?
Return deferrals and suspend for balance of original 12-month period?
IRS response; Starting a new 12-month period doesn't meet the rules.
Deferrals (and match, if applicable) should be forfeited and the balance of the 12-month suspension should be applied.
Of course, the employee should be made whole outside of the plan (i.e., no distribution from the plan to the employee).
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We have submitted a VCP to the IRS on this very issue. Initially, we proposed to take out the contributions that should not have been made plus earnings and this was approved. In attempting to implement this, however, we found that most of the affected participants did not have sufficient amounts in the money types in question (because of subsequent loans and/or withdrawals) to make this an unworkable solution. We went back to the IRS and they proposed a prospective suspension. The problem was that a number of years had elapsed between the time the amounts were improperly contributed, the first compliance statement was issued and then the second VCP request was submitted and resolved and a final compliance statement issued, that the participants who were impacted complained that the prospective suspension would be coming when they earned a much higher rate of pay. The bottom line is, if you are consider the refund method, take a look to see if there would be sufficient money in the participants' accounts to effect the refund. If not, then use the prospective suspension.
8/10/2007 Benefits Link posting (Note: wouldn’t try it other than under VCP)
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EPCRS Phone Forum notes (file date 10/18/2012 on my computer)ELECTIVE DEFERRALS NOT SUSPENDED FOLLOWING FINANCIAL HARDSHIP WITHDRAWALS
•
Failure: Elective deferrals weren’t suspended following financial hardship withdrawals as required by the plan terms. Pursuant to Treas. Reg. §1.401(k)- 1(d)(3)(iv)(E)(2) a plan (or other legally enforceable agreement) must prohibit an employee from deferring or making employee contributions for at least 6 months after receipt of a hardship distribution.
•
Correction: Current taxable distribution of the 6 months' worth of "improper" deferrals, adjusted for earnings. Where appropriate, the employee must also forfeit any matching contributions associated with such deferrals.
•
Example: Misaki is a participant in the Carco, Inc. 401(k) plan. In 2010 Misaki elected to defer 5% of her compensation. Her 2010 plan compensation was $50,000, paid in equal bi-weekly installments. On June 15, 2010 Misaki took a hardship distribution from the plan. Carco failed to suspend Misaki’s elective deferrals for a six month period following such hardship withdrawal. Such suspension should have occurred during the six month period between July 1, 2010 and December 31, 2010. Instead, Misaki was permitted to defer $1,250 during this period. Carco files a VCP application in 2012 for its failure to have suspended deferrals. Carco must distribute $1,250 plus earnings to Misaki to correct the failure.
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EPCRS Phone forum (file dated 9/13/2010 on the computer)
Failure to suspend deferrals contd..
•
Option 1- Can plan return the improper elective deferrals (adjusted for earnings) to employee? Yes. This would put the participant in the same position he or she would have been in had failure not occurred.
•
Option 2- Can plan suspend elective deferrals for a six month period going forward? Possibly. However,this may not put the participant in the same position.
E.g. Matching contribution levels for the six monthperiod going forward could be different than whatthey were during suspension period. Participant may quit employment before expiration of 6 month period.
Option 3- Take no action. Revise administrative procedures going forward? No. The failure will not have been corrected.
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IRS EPCRS slide show date 10/31/2014
VCP – Failure to suspend deferrals
following 401(k) hardship withdrawals
Question: A 401(k) plan that follows the safe harbor rules on
hardship withdrawals correctly allows a participant to
receive a hardship withdrawal but fails to suspend the
participant’s deferrals for a period of six months following
the withdrawal. What is the preferred correction?
Answer: The preferred correction is to distribute the ineligible
elective deferrals to the employee, and where appropriate,
forfeit any matching contributions associated with those
deferrals, adjusted for earnings.
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IRS Phone forum 7/25/2013
Option 1- Can plan return the improper elective deferrals (adjusted for earnings) to employee? Yes. This would put the participant in the same position he or she would have been in had failure not occurred.
•Option 2- Can plan suspend elective deferrals for a six month period going forward? Possibly. However, this may not put the participant in the same position.
•Matching contribution levels for the six month period going forward could be different than what they were during suspension period.
•Participant may quit employment before expiration of 6 month period.