Mandatory 20% withholding on hardship distribution not paid.

[rblum50]

I have acquired a client that has an existing plan participant that took a hardship distribution for $20,000 in calendar year 2023. Rather than paying this participant the net amount after 20% withholding of $16,000, he had the entire gross amount $20,000 distributed to him. When the 1099-R was prepared, It showed that the distribution made to him was the entire $20,000 with all of it being taxable and no taxes being paid in calendar year 2023. What are the implications of distributing the gross amount and not the net amount? Not trying to make excuses, but the participant paid the taxes on the entire amount of $20,000 and it is basically a timing matter.

[C. B. Zeller]

A hardship is not an eligible rollover distribution, so there is no mandatory withholding.

There is 10% automatic withholding but that can be waived. I don't see a problem here.