Too Much Taken From Account

[thepensionmaven]

We have a participant in a 401(k) plan that took a plan loan in 2017 and two (2) hardship distributions two months apart in 2018.

He is repaying the loan, and now wants another hardship distribution, which he does not qualify for.

The total sum taken from his account is over $200,000. Question, if the plan were to be audited, would not the IRS consider this a breach of fiduciary duty to have signed off on these distributions?

[ESOP Guy]

I think you have left out some important facts. 

What is causing your concern?

Was the loan over the limits?

Were the hardships not legit? 

[thepensionmaven]

My cause for concern, being proactive in determining an IRS or DOL position upon audit, is that either or both agencies might see this as a participant using his account as a savings account and the Trustee may not have advised the participant as such. 

The loan is not over limits and, so far, the hardships have met the safe harbor requirements

[jpod]

Yes, he is using his retirement account as a savings account, but based on what you say there does not appear to be any plan qualification risk or fiduciary-breach risk.  What alternative course of action should the PA have considered in your view?  Deny a perfectly compliant loan?  Deny a perfectly compliant hardship withdrawal?    

Hardship withdrawals s_ck.  We used to think that allowing for hardships was necessary to entice employees to save (with the side effect of increasing the likelihood of passing ADP).  What does the modern literature say about that? 

 

[chc93]

We had one plan sponsor who does not allow loans... for the very reason that the plan is a "retirement" account and not a "savings" account.  He even didn't allow hardship withdrawals at first, but has since reconsidered and now allows hardship.