Hardship for an Alternate Payee - QDRO

[ratherbereading]

Can an alternate payee (ex-spouse) request a hardship from the Plan?  I have an alternate payee that wants to do this. The plan document is silent on it. They first wanted a loan, which obviously they cannot have because payments cannot be made via payroll. Not sure about hardships though.

 

Thanks in advance!

[ETA Consulting LLC]

Typically, a "hardship" is taken when there are no other available distributions or loans from the plan.  So, you're saying that the Alternate Payee has a separate account under the plan, but the plan has them restricted from taking withdrawals. This may be the case, but I'm asking.  Your first approach would be to ascertain whether the alternate payee already has a right to a distribution under the written terms of  the plan.  If you're on a pre-approved plan, that language may be found in the Basic Plan Document.  I would doubt the plan's language would go as far a saying a "hardship" as this is merely a withdrawal mechanism for elective deferrals (and the QDRO itself would not be subject to that statutory restriction).

Good Luck!

[ratherbereading]

The plan does not prevent the spouse (alternate payee)  from taking a withdrawal, but for some reason, they want to leave the money in the plan and take a hardship.

 

[RatherBeGolfing]

18 minutes ago, KarolineWriter said:

The plan does not prevent the spouse (alternate payee)  from taking a withdrawal, but for some reason, they want to leave the money in the plan and take a hardship.

 

The Plan does not prevent AP from taking a distribution, so the hardship question is moot.  Even if we came to the conclusion that an AP could take a hardship, wouldn't you fail the immediate and heavy financial need requirement if you have other distributions options?  What the AP wants is really irrelevant here since the need can be satisfied without the hardship.

 

[My 2 cents]

2 hours ago, KarolineWriter said:

The plan does not prevent the spouse (alternate payee)  from taking a withdrawal, but for some reason, they want to leave the money in the plan and take a hardship.

 

I do not understand this statement.  A hardship distribution inevitably consists of removing funds from the plan.  It's a distribution, and whatever is paid is no longer in the plan and cannot be put back.  Is someone confusing taking a loan with taking a hardship distribution?

[TPAJake]

Totally agree with RatherBeGolfing, the AP has funds available for unrestricted distribution & therefore cannot qualify for a hardship.  

[My 2 cents]

Key point is that it is impossible for the AP to be paid anything and for the money to also remain in the plan.  You know, can't have your cake and eat it too, right?

[ratherbereading]

After discussing this with our TPA's ERISA attorney, yes, the alternate payee may take a hardship from her account as long as she meets the requirements, and she does.

[ratherbereading]

On ‎9‎/‎7‎/‎2017 at 10:44 AM, My 2 cents said:

I do not understand this statement.  A hardship distribution inevitably consists of removing funds from the plan.  It's a distribution, and whatever is paid is no longer in the plan and cannot be put back.  Is someone confusing taking a loan with taking a hardship distribution?

No, no confusion between a loan and hardship.  She is only taking a portion as a hardship; therefore, some of her money will still remain in the plan

[RatherBeGolfing]

10 minutes ago, KarolineWriter said:

After discussing this with our TPA's ERISA attorney, yes, the alternate payee may take a hardship from her account as long as she meets the requirements, and she does.

I don't disagree that an AP could a hardship if she meets the requirements.  Obviously not my document or concern, but I'm curious how she meets the hardship requirements when she is eligible for a distribution.  In reality, what is the difference between the taking $10,000 as a distribution per the QDRO, or $10,000 as a hardship from the segregated account?  Withholding requirements?

[My 2 cents]

It would not surprise me if the plan would permit the AP to receive a partial distribution of his or her account (with the amount payable now being under his or her control).  If the account is $15,000, all of which is eligible for payout, why shouldn't he or she be able to take $5,000 now and defer the receipt of the remainder?  If the plan doesn't allow that, why would it allow it with the complications of application for a partial withdrawal subject to demonstration of hardship? 

If the withholding requirements would depend on whether it was a mere withdrawal or a hardship withdrawal, that makes no sense.  It's all taxable as ordinary income either way, right?

[duckthing]

Hmm... I guess maybe they're trying to avoid mandatory withholding? Or maybe they think they can dodge the early withdrawal penalty by taking it as a hardship?

I'm still with RatherBeGolfing on the "immediate and heavy financial need" issue being a show-stopper here. But I'll defer to the attorney who's actually looking at the document, I guess!

[QDROphile]

No early distribution tax on distributions pursuant to QDRO. The AP is trying to receive a distribution in a form that appears to be unavailable under the plan, although the original poster has not provided adequate information about plan terms;  this is all about plan terms.

[TPAJake]

It still fails the needs test for me. The AP has other funds available to satisfy the need, namely a partial withdrawal from said Plan...  I'd deny it as a hardship, but certainly approve it as a QDRO withdrawal.   

[My 2 cents]

If the plan does not permit hardship withdrawals by alternate payees, the request should be denied on that basis.  Are there any tax advantages* to receiving a hardship withdrawal over a partial normal withdrawal??

*It was noted by QDROphile that there is no early distribution tax on distributions pursuant to a QDRO, and I have no reason to doubt that.  If normal withdrawals are subject to the standard minimum withholding but hardship withdrawals are not, that is NOT a tax advantage - amounts withheld are inevitably either applied to taxes due or refunded.  If you owe $8,000 in taxes for a distribution and $10,000 was withheld, you file and get the $2,000 back.  If you owe $8,000 and $6,000 was withheld, then you need to pony up the $2,000 underwithheld.(plus, if applicable, underwithholding penalty).  Required withholding is not a tax impact.