First hardship amendment issue

Plan was amended to allow for QNECs as hardship source, but they weren't offered as a source to Participants. Plan's only QNECs were two years of safe harbor contributions from 5 or 6 years ago. Only one participant requested a withdrawal of the maximum amount available. Can we treat as an operational error and allow a withdrawal now?

On 2/11/2022 at 1:35 PM, MarkS said:

but they weren't offered as a source to Participants

MarkS, are you saying everything's OK except that the availability of QNECs as source of hardship distribution was not communicated to employees? If that's the case I would argue it's not a Code/IRS violation, but an ERISA disclosure violation for which the correction is to communicate the change ASAP to all the plan's participants.

8 hours ago, Luke Bailey said:

the correction is to communicate the change ASAP to all the plan's participants.

And the record keeper so they can make the change on their end.

If I'm understanding the question correctly, the circumstance is something like this:

Participant had a deferral balance of $8,000 and a QNEC balance of $2,000. They experienced a financial hardship of $10,000 or more and requested a hardship distribution of $10,000. The plan only distributed $8,000, even though the plan provisions in effect at the time permitted both deferrals and QNECs to be distributed in event of a financial hardship.

The question is, can the $2,000 QNEC balance be distributed now? If the hardship still exists, then I think the answer is clearly yes.

If the hardship doesn't still exist, then you would be looking to see if there is a self-correction method available for this underpayment. I don't believe this scenario is explicitly addressed in rev proc 2021-30, so it would be up to the plan administrator to determine a reasonable method of correction. It would seem reasonable to me to distribute the amount now, with earnings, but I am neither the administrator of this plan, nor the IRS.

And then I suppose it becomes a reportable issue on Form 5500, as a failure to provide a benefit payment when due (10f on the 5500-SF)

The Plan was amended after the hardship distribution at issue, but the effective date was retro to that time period. I think there are going to be issues with the effective dates of these hardship amendments. Thanks for the feedback.