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Hardship Dist, SSDI... Just want to verify rules


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A participant's wife is applying for SSDI.   In the meantime the participant wants to take a hardship distribution of close to his plan balance.  He has roughly -

  • 1/3 ROTH deferral account
  • 1/3 SH Match
  • 1/3 PS

100% vested in all accounts. 

1 - I would think he qualifies for a hardship dist... right?
2- If the dist happens, he must cease his deferrals for 6 months?  Was that repealed? (well, you would think if he needs the $ he would stop deferring)
3- Taxes must be withheld (20%) and the 1099R would be coded as premature so will be subject to the 10% excise tax.

What am I missing?

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29 minutes ago, Basically said:

1 - I would think he qualifies for a hardship dist... right?

Does the plan permit hardship distributions? If so, from what sources? What is the amount of the financial need? Does the plan use the safe harbor definition of financial hardship, or does it use the facts-and-circumstances definition? If it uses the safe harbor definition, under which reason does the participant purport to qualify?

32 minutes ago, Basically said:

2- If the dist happens, he must cease his deferrals for 6 months?  Was that repealed? (well, you would think if he needs the $ he would stop deferring)

No. Suspending deferrals after a hardship distribution has not been required (and has been illegal, actually) since 2019.

34 minutes ago, Basically said:

3- Taxes must be withheld (20%) and the 1099R would be coded as premature so will be subject to the 10% excise tax.

A hardship distribution is not an eligible rollover distribution so the automatic withholding rate for federal income tax is 10%. The participant could waive that, or elect a different amount.

If the participant is under age 59½ and does not meet any of the exceptions under IRC 72(t), then the distribution would be subject to the 10% penalty tax, in addition to income tax at the participant's normal tax rate.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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