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New Hardship Guidelines - Impact of in-service distributions


jim241

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Part of the newly issued hardship regulations in determining whether an amount satisfies an immediate and heavy financial need was to replace the facts and circumstances test with the three requirements here: 

Amount Necessary to Satisfy Need. A distribution will be considered as necessary to satisfy your immediate and heavy financial need only if:

(1)          You have obtained all distributions, other than hardship distributions, under all plans maintained by the Employer;

(2)          The distribution is not in excess of the amount of an immediate and heavy financial need (including amounts necessary to pay any federal, state or local income taxes or penalties reasonably  anticipated to result from the distribution).

(3)          You have represented in writing or by electronic medium that you have insufficient cash or other liquid assets to satisfy the financial need.

My question is, in regards to (1) above - does this mean theoretically that a participant who is age 59 1/2 or older and thus eligible for an in-service distribution, must take the in-service distribution and get hit with a 20% withholding prior to taking a hardship distribution? 

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1 hour ago, jim241 said:

Part of the newly issued hardship regulations in determining whether an amount satisfies an immediate and heavy financial need was to replace the facts and circumstances test with the three requirements here: 

Amount Necessary to Satisfy Need. A distribution will be considered as necessary to satisfy your immediate and heavy financial need only if:

(1)          You have obtained all distributions, other than hardship distributions, under all plans maintained by the Employer;

(2)          The distribution is not in excess of the amount of an immediate and heavy financial need (including amounts necessary to pay any federal, state or local income taxes or penalties reasonably  anticipated to result from the distribution).

(3)          You have represented in writing or by electronic medium that you have insufficient cash or other liquid assets to satisfy the financial need.

My question is, in regards to (1) above - does this mean theoretically that a participant who is age 59 1/2 or older and thus eligible for an in-service distribution, must take the in-service distribution and get hit with a 20% withholding tax prior to taking a hardship distribution? 

There is no such thing as a 20% withholding tax.  It is simply 20% withholding!  The ultimate tax will be determined when the person's yearly return is completed and the amount withheld is compared to the amount owed.  For some people 20% will be too little and they will still owe more; for some it will only increase their refund.  But it is NOT a tax itself.

Now, as to the question asked, I think we really don't know at this point.  The regs might certainly be read that way, but for some reason, I'm betting IRS is going to say that they weren't including "in service withdrawals" from the list, but I certainly could be wrong.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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If someone wishes to avoid the 20% w/h (for example, because his income is low enough after deductions that the money will be taxed only at 10% or 12%, or maybe even 0%), he can first roll an age 59-1/2 distribution to an IRA, then take money out of the IRA with no w/h.   

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19 minutes ago, jpod said:

If someone wishes to avoid the 20% w/h (for example, because his income is low enough after deductions that the money will be taxed only at 10% or 12%, or maybe even 0%), he can first roll an age 59-1/2 distribution to an IRA, then take money out of the IRA with no w/h.   

Which is one of the reasons why I think the IRS will NOT end up requiring in service withdrawals as part of the requirements, but that still is just an informed opinion, with no back up yet from IRS (that I know of).

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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I agree with the other posters.  We all are assuming that the plan document contains an age 59-1/2 in-service withdrawal option.  The participants has to exhaust that withdrawal option before a hardship in-service distribution may be made.

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If the worry is that a distribution other than a hardship distribution might reduce a net payment (after withholding toward Federal, State, and local income taxes) to less than an amount the participant needs to meet an expense, wouldn't the participant claim a bigger amount (up to the available subaccount balance)?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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On ‎10‎/‎30‎/‎2019 at 4:13 PM, Larry Starr said:

Which is one of the reasons why I think the IRS will NOT end up requiring in service withdrawals as part of the requirements, but that still is just an informed opinion, with no back up yet from IRS (that I know of).

Larry, what do you mean? Do you think they are going to amend the final reg? As jim241 states in question, the reg says that the participant must take all non-hardship distributions available under employer's qualified and nonqualified plans before taking a hardship.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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34 minutes ago, Luke Bailey said:

Larry, what do you mean? Do you think they are going to amend the final reg? As jim241 states in question, the reg says that the participant must take all non-hardship distributions available under employer's qualified and nonqualified plans before taking a hardship.

Luke, as I said, I believe "they" will fix this; I don't know how. It could be informal guidance that they will not enforce the rule in this circumstance, or something else.  I just have a belief that they didn't consider this issue and that it is an obvious oversight.  Maybe I'm right and maybe not.  As I noted, this is just an informed opinion, but no guarantee.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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  • 2 months later...

"(3)          You have represented in writing or by electronic medium that you have insufficient cash or other liquid assets to satisfy the financial need."

But the Plan Administrator is still required to be supplied with documentation of the financial need, correct? (Unless they are willing to rely on the participant having and retaining the pertinent documents - good luck with that...) - what are folks doing with this?

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A plan’s administrator or claims administrator might require a hardship claimant to submit source documents with her claim.

 

Or an administrator might follow the IRS’s guidance to its examiners to allow a claim on a “summary” of the hardship claim and the administrator’s notice to a claimant that “[t]he recipient agrees to preserve source documents and to make them available at any time, upon request, to the employer or administrator.”

 

As I read the whole text, the IRS’s non-enforcement guidance to its examiners does not depend on hardship distributees having kept the source documents, but rather on finding that the plan’s administrator did not know that distributees breach that obligation.

 

Because the February 23, 2017 memo expired, here are links to its compilation in the Internal Revenue Manual.  Internal Revenue Manual 4.72.2.7.4.1and its Exhibit 4.72.2-1 (Aug. 9, 2019).

https://www.irs.gov/irm/part4/irm_04-072-002

https://www.irs.gov/irm/part4/irm_04-072-002#idm140613714794176

 

About “what are folks doing with this?”, the practical way to get information is to survey recordkeepers (and § 3(16)(A) service providers) about whether they offer a choice of methods, and which method most customers choose or fall in with.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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