Timeframe for one-year suspension, of elective deferrals to 401(k) arr

[James Matt Ullakko]

A Plan adopts the safe-harbor hardship definition.

The plan has allowed elective contributions to a 401(k) arrangement for a participant that should have been suspended due to hardship reasons.

I think as long as the hardship suspension of one year OCCURS it is okay that elective deferrals are allocated to the participant's account subsequent to taking the hardship w/d. But how long can contributions keep coming?

When looking at the regs. I believe it states that the suspension must occur as soon as administratively possible.

What is the timeframe for as soon as administratively possible?

At what point would the elective deferrals be treated as prohibited transactions?

[R. Butler]

Reg. §1.401(k)-1(d)(2)(iv)(B)(4) states that an employee cannot defer for a period of 12 months after "receipt" of the hardship distribution. We have never read an "administratively possible" requirement into the reg. Obviously it would be possible to have deferrals already withheld in transit, but the actual deferral withholding should cease immediately.

I'm might be wrong on this, but I don't see how this is ever a prohibited transaction. If the participant continues to defer it would be an operational failure. Generally prohibited transactions involve an imperrmissable use of plan assets to benefit a party-in-interst. Thats not occurring here.

[Guest]

there is an old Q & A (#21) under the Q & A board :correcting plan defects.

basic method is APRSC (ok, so now its SCP) is to return $ plus earnings.

Simply Stopping deferrals at this point in time, while described in this Q & A, is heavily frowned upon.

Q & A 110, certainly more recent, says the same thing in regards to returning the money.

[James Matt Ullakko]

The applicable match with applicable earnings would have to be returned too...? Suspension would begin date of first contribution returned...?

Thank you for your responses...

[R. Butler]

Contributions should be suspended immediately for the remainder of the 12 month period. The 12 month is still deemed to have began as of the date the hardship distribution was received.

Related match and earnings thereon should be taken from the participants' account. We never actually return the money to the employer, but rather employer applies it as a credit against future matching contributions.