Hardship Withdrawal Request ROTH

[Pammie57]

I had a client call me with a participant wanting a hardship withdrawal.  All of his money is in ROTH deferrals.  Does he  need to request a hardship, or can he just take his ROTH out ?  He has not been in the plan 5 years however - only 3.  I am not sure of hardship rules as they apply to ROTH....  I can't seem to find anything definitive either.  Anybody know for sure?  He's only 32 and their inservice rules are age 59 1/2.  

He does have  a true hardship.  

[Kac1214]

Read the plan document. It will tell you the sources available and and further state if non-qualified Roth money can be withdrawn. 

[Luke Bailey]

27 minutes ago, Kac1214 said:

Read the plan document. It will tell you the sources available and and further state if non-qualified Roth money can be withdrawn.  

Kac1214's advice is certainly sound, but I will tell you that in terms of Code and regs, the rules for hardship withdrawals are indifferent as to whether elective deferral source consists of pre-tax, Roth, or both. Only the taxation of the amounts (basis not taxed, nothing taxed if Roth holding period met so that distribution "qualified") will be different, and those rules are very unlikely to be in plan document, although they may be in SPD. The plan should also have allocation rules where account includes Roth and non-Roth, but that is apparently not your case as everything appears to be Roth. Note that it would be unusual for a hardship distribution including amounts from designated Roth account to be "qualified," since, assuming five-year period has been met, most plans would permit distribution after 59-1/2 or disability without showing "hardship."

[Doc Ument]

I agree with Luke.

[Kac1214]

We use FT William Document and it has the following  

G. Hardship

3a. Hardship withdrawals are allowed from the portion of a Participant's Accounts described below. (If "None", questions regarding Hardship withdrawals are disregarded.)        Selected Accounts         

  3a.i. Hardship withdrawal is permitted from Elective Deferral Account                      Yes /  No        

  3e. If Roth Elective Deferrals are permitted and hardships allowed from Elective Deferral Account, permit hardships from Roth Elective Deferral Account        Yes - only if qualified distribution          

[Doc Ument]

The original question was: Can he take all his Roth money out?   The answer is maybe he can, and maybe he can't.   As Luke and I pointed out, we agree with Kac1214 (and you) that a plan may provide for different distribution options for pretax vs. Roth.   What Luke and I are pointing out is that any such provisions are ALSO subject to the in-service distribution qualification rules and the hardship qualification rules, all of which apply equally to pretax and Roth deferrals.   So the participant who wants all his Roth money is entitled to all of it (if still employed) only if the participant meets the criteria for (1)an in-service distribution of "deferrals" or (2) a hardship distribution of "deferrals" and if the plan has an option to allow distribution of Roth funds (but not pretax funds) in accordance with the plan's general in-service distribution rules (or the plan's general hardship distribution rules).  Every qualified plan is going to have restrictions, e.g., in-service distributions cannot be made prior to age 59 1/2 or hardship, and hardship is limited, for example, to the maximum amount that meets the financial need.   So the administrator needs to determine what amount can be paid under ALL the provisions of the AA and BPD bearing on the subject, some of which make a distinction between Roth and pretax, and some of which don't.   So, any general restriction on the distribution of "elective deferrals" applies to Roth deferrals, even if the box is checked that Roth deferrals "may" be distributed pursuant to an option on the AA so stating.   That AA option does not exist in a vacuum.   If this person is under age 59 1/2, still working, and does not have a financial hardship as defined in the plan, I view it as extremely likely that I could find language in the BPD prohibiting the distribution of Roth funds AT THIS TIME.   Maybe later, like when he is age 59 1/2, or when he has a plan-defined hardship, or the plan terminates (without any other DC plan within the controlled group to which all deferrals must go in the event of a plan termination).   See Regulation 1.401(k)-1(d) with respect to age 59 1/2 and plan termination, and somewhere else in that regulation with regard to hardships.  It's not his money, not yet, it is still trust assets in a tax-qualified trust associated with a tax-qualified 401(k) plan.

[Luke Bailey]

Thanks, Doc Ument. To clarify my understanding of the issue that I think Kac1214 is raising, the AA language quoted by Kac1214 seems to require (or provide the option to elect; not clear to me from excerpt) that Roth elective account can be used to fund hardship only to extent the distribution would be qualified for complete federal income tax exclusion. As you point out, though permissible, that is not a requirement of Code or regs, and seems like an odd design choice. If the participant needs the money, he/she needs the money.