Failed to suspend deferrals after h'ship--now what?

[BG5150]

Participant took a hardship in 2018, but the ER did not suspend the deferrals.  What do we do now?

I think we just suspend the deferrals for 6 months going forward? 

What about the "no more suspension" rules for hardships?

[Peter Gulia]

When in 2018 did the participant get the hardship distribution?

 

[Tom Poje]

according to the research I did many moons ago for an ASPPA Talk in 2010

1999 ASPPA Q and A

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?

1. Start a full 12-month suspension when the error is discovered?
2. Distribute impermissible deferrals and earnings?
3. 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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  .........................

  someone posted the following comment on Benefits Link as well

   

  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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  of course, since I gave the presentation those might be useless, and certainly the first was back in the days the regs required a 12 month suspension so you'd have to change the logic to 6 months. . and I see the talk included a Lockhorns cartoon from 8/11/2010

   

   

  

   

  and the Dinette Set 3/20/2010

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[ratherbereading]

I think you will find your answer here … https://www.irs.gov/retirement-plans/correct-common-hardship-distribution-errors

[Luke Bailey]

So if you take option 1 under the soft guidance that CEW points out, i.e., you suspend prospectively, AND, the plan decides that it will optionally apply the rule removing the 6-month suspension in 2019 vs. waiting until 2020 under the proposed regs, I would argue you're done, i.e., no suspension at all is self-correction under EPCRS. If the plan wants to keep the 6-month suspension for 2019 (why?), then suspend him/her now for 6 months.