Resuming deferrals after 6 month break after hardship

Good morning to all,

A participant in one of our plans received a hardship distribution in March of 2019 from her 401(k) account.  At that time, she was required to "sit out" from making subsequent deferrals for 6 months.  The question is, whose responsibility was it to resume her deferrals?  Is the burden on the participant to notify HR that she would like to start back up, or is the burden on the HR department to contact the participant and ask her if she would like to resume deferrals?  Or even possibly, was HR supposed to automatically resume her deferrals after 6 months based on prior instructions from the participant given prior to the hardship distribution?

In any event, she has not made deferrals since that hardship distribution, a little over 2 years ago, and is now complaining to the new financial director that her deferrals should never have been stopped because "she never signed a waiver asking not to participate".  We are trying to help figure out whether any back deferrals, match, and interest are due to her from the date 6 months after the hardship withdrawal was made through today.

I have researched this various places and cannot find this particular question addressed.

Thank you,

ldr

Does the plan document, SPD, or any "written administrative procedures" outline the specifics of what's expected to occur?  

My natural inclination is that when a suspension is lifted, deferrals should start right back up - but that's in the absence of any established, communicated, procedures to the contrary.

Following Bri’s theme of looking to the documents, here’s another way to think about the question ldr asks.

Imagine a plan’s sponsor has adopted nothing beyond whatever results from using the package of IRS-preapproved and related documents you usually present. The only documents, including plan-administration procedures and a summary plan description, are those that result from your service.

Would those documents:

(1)   make the participant responsible to act affirmatively to resume elective deferrals?

(2)   make the administrator responsible for resuming the participant’s deferrals?

(3)   not provide an answer in either direction?

And if it’s #3, how would you interpret the plan?

Hi to Bri and Peter,

The basic plan document underlying the Adoption Agreement says that the employer may stop the deferrals after a hardship distribution in order to satisfy the requirements of law (blah blah blah) but does not mention anything at all about resuming the deferrals after the break.  The Adoption Agreement does not even refer to the requirement to sit out for 6 months at all and neither does the SPD.  The participant would have no way of knowing that a 6 month break would be imposed, were it not for the fact that she has had 3 previous hardship withdrawals over the years and 3 previous times where she had to stop deferrals for 6 months.

My inclination is to recommend that the employer does the make-up contribution, which as I understand it, would be 50% of the deferrals she would have made if they had resumed on time, plus the accompanying match, plus the missed earnings.  My reasoning is this:  1) An axiom I learned many years ago was "if you must err, err in favor of the participant"; 2) She has worked there since 2003 and is still there (!); 3) She knows or at least strongly suspects an error has been made and restitution is due; 4) the payroll department is notoriously inept and has made a myriad of other mistakes that we are trying to get corrected; 5) this is a plan that is subject to audit and the current auditor quit.  Not just quit this plan, but quit auditing 401(k) plans altogether, over the experience he had this year with this plan. Next year's new auditor will probably put this plan under a microscope.  6) It seems to me that it could be argued that her deferral election form which was in place at the time of the suspension remains valid until revoked.  It could be argued that the suspension was something imposed by the employer and therefore the employer is responsible for following her directions on her form as soon as the suspension period is over.

I wish I could find chapter and verse in the book of some guru or on ERISApedia or in the plan document itself, but in the absence of all that, I think I will just go with the logic I just stated.

Thanks for your input!

One more play: Did you read the forms the participant signed (whether in ink, or electronically) when she claimed the hardship distribution?

Some recordkeepers design those forms to include the claimant’s assent to her responsibility to resume deferrals.

That's brilliant, Peter!  I will see what I can find out.

Peter, this was gold.  On the form we find the following:

"Suspension of elective deferrals to all employer plans is required for a minimum of 6 months under the safe-harbor option.  At the end of this period, a new Salary Reduction Agreement needs to be submitted in order to re-start your elective deferrals."

Of course the participant can say she didn't read it, didn't see it, didn't understand it.....and the employer might even agree to a make-up contribution just to keep the peace.  But regardless of all that, Peter, this was great advice.

Thank you!

So the outcome was that the employer decided to probably do a make-up contribution anyway, even though they were legally not at fault, on the presumption that in the past, most likely, payroll had automatically resumed the deferrals of employees who sat out for 6 months due to a hardship distribution.  It's not a done deal yet but that is the direction they are leaning at this time.  I will post the final outcome so those following the story are not left wondering how it turned out!