Hardship Amendment - QNEC/QMACs allowed

We have been administering hardships as follows for our clients:

-If the document said "all sources" are available for hardships, then we allowed from QNEC/QMAC/Safe Harbor.

-IF the said  just Elective Deferrals then we treated them as not eligible.

This treatment appeared to us at least to be the most logical path forward.  The problem is that the Corbel/FIS Amendment was drafted it forces us to choose a default of "QNECs are available" or "QNECs are not available."  A binary decision which will lead to probably half of our amendments requiring employer sign off.  I prefer to have a formula that says "IF all sources is selected in the Adoption Agreement, then QNECs are available.  If individual sources were selected in the Adoption Agreement, then QNECs are not available."

What are others doing with this?  I'm not sure how other document providers handled this, but I guess it doesn;t have to be exclusive to Corbel/FIS.  Are others in the same pickle?

I haven't looked into this, but it isn't an IRS-approved model language interim amendment, so couldn't you modify? In other words, do 2 different sponsor level amendments - one for each "default" so there's no employer sign-off required? Just a thought...

Thats exactly what  I'm doing - One amenmdnet, but it says "If this, then this applies, else that applies."  I'm really more curious if others have reached the same conclusion.  When I was discussing with FIS I just couldn't tell if they were really thinking "Hmm, the International Man of Mystery has a point" or "This guy missed the boat on this."  

I mean I guess overall, one policy that says "QNECs/QMACs are eligible for hardship" or "are not eligible for hardship" just doesnt seem practical.  Am I alone in that?  I often find myself alone on these message boards, so I'm comfortable being here, just curious if I am or not... 

Hello -- and you are not alone! I was glad to see your post/question. We administratively did the same thing, based on whether the plan allowed all sources or limited sources. I asked the same question at an FIS Advanced Pension Conference and was told (I believe by Derrin Watson) that we couldn't have two defaults signed by us as the document sponsor. We need to "pick one" as our default and sign the amendment on the plan's behalf. For the second group, the employer needs to sign the amendment. Obviously, we are not excited about that answer! I'm interested in your "if this, then this" words approach in the amendment as an alternative, and I'm curious to see if others are in the same boat...

6 minutes ago, DKE said:

Hello -- and you are not alone! I was glad to see your post/question.

You made my day.

Hey Austin - question for you while we are on the amendment subject. I just looked at the FIS CARES Amendments that they developed in May. I'm curious - since the amendments are not generally required until way into the future, and since it is very possible that additional guidance/change will be developed which may require updated versions of these amendments, do you see any point (generally) in trying to get these adopted relatively soon? My thought is to wait, since they may well change - perhaps include them in the package with any DC restatements (that are completed prior to the CARES Amendment deadline). 

I don't recall perfectly well, but are those 100% finalized, or just done for the short-term for plans that were terminating?  I wouldn't do it yet.  i.e., I think as more guidance gets released they might change the amendment (at least I suppose it would be impossible to rule that out).

We use FIS and this is what I came up with for the "will QNECs and QMACs be available?" question.  It really blows my mind that this was not the approach since as far as I can tell it comes up with the correct outcome 100% of the time.

Expansion of sources available for a hardship distribution. Pursuant to Amendment Section 3.2, QNECs and QMACs will only be available for hardship distributions if in the Adoption Agreement the Employer has elected that such distributions are permitted from all Accounts (other than those restricted by law).
 

I appreciate any feedback, ESPECIALLY if I screwed something up!

This fits better with the overall structure of the amendment.

Expansion of sources available for a hardship distribution. Pursuant to Amendment Section 3.2, are QNECs and QMACs available for hardship distributions?

a.     [   ]      YES. QNECs and QMACs are available for hardship distributions.

b.     [   ]      NO. QNECs and QMACs are not available for hardship distributions.

c.     [X]      Pursuant to Adoption Agreement. QNECs and QMACs will only be available for hardship distributions if in the Adoption Agreement the Employer has elected that such distributions are permitted from all Accounts (other than those restricted by law).

Another question: how do people feel about including "formulas" in the Summary of Material Modifications?  So for example, I can write my SMM to include a similar formula to the one I have included above.  It will be worded more plain-English, but is that permitted?  I assume there is no prohibition on SMM's.

I'm willing to stipulate that it of course would be "better" to customize each one, but that is an enormous additional cost in terms of manpower.

Hi Austin, thank you for sharing your draft language for the amendment. That's helpful as we consider how we will approach the differing defaults, and I don't have any suggestions or edits to the language.

We prepared and distributed the SMM earlier this year, and we elected to specify and customize. Since we didn't use the document system, this was fairly easy using Word versions.

Are you planning to make the plan specific election in the document system? And then apply special language/library text to update the language in the actual amendment? We also use FIS, so I'm pondering how this will work with the SPD the system will generate if there are no elections in the hardship amendment source section...

We had a client's participant ask today for a hardship withdrawal, and they are arguing that regular non-elective profit sharing funds are to be allowed.  I don't see that anywhere.  The participant  and representative are wearing us out on this - cited something from the IRS that had the word profit sharing in it.  The original document only allowed hardships from the deferrals.  They plan to adopt the new regs/relaxed Hardship requirements.   Can anybody tell me if profit sharing (on a vesting schedule) is allowed now?  Thanks

Dazed and confused.

Profit sharing can be used for in-service withdrawals, including hardships - but that was always the case.

They are not required to allow hardships from profit sharing under the new regs. They could, of course, amend the plan to permit it if they so choose.

See IRS issue snapshot here:

https://www.irs.gov/retirement-plans/hardship-distributions-from-401k-plans

Excerpt (bold in original):

Hardship distributions other than elective deferrals

Beginning in 2019, hardship distributions may be made from:

• Elective deferrals
• Qualified nonelective contributions (QNECs).
• Qualified matching contributions (QMACs)
• Earnings attributable to any of these. See IRC § 401(k)(14)(A).

Funds attributable to employer discretionary and matching contributions (other than QMACs and QNECs) may be distributed under more lenient hardship rules, provided that “hardship” is sufficiently defined, consistently applied, and the distribution does not exceed a participant’s vested interest. See Rev. Rul. 71-224. A plan does not have to use the criteria set forth in Reg. § 1.401(k)-1(d)(3), discussed above, for making hardship distributions of these funds, but as a practical matter most plans do in order to avoid having two administrative and review procedures.

On 7/24/2020 at 12:00 PM, DKE said:

Are you planning to make the plan specific election in the document system? And then apply special language/library text to update the language in the actual amendment? We also use FIS, so I'm pondering how this will work with the SPD the system will generate if there are no elections in the hardship amendment source section...

When we are doing restatements, that is a one by one process anyway, so we can just check the boxes per the default rule we set up.  So no, it will not map over, but since a person has to touch everyone, and because we always have a set of "rules" for that person to follow, one of the steps would be to check the boxes in accordance with that default.  So yeah, I was concerned about that too, but that's how we got around it.

10 minutes ago, EBECatty said:

Earnings attributable to any of these. See IRC § 401(k)(14)(A).

Just be aware that in Congress' infinite wisdom, they did not extend this courtesy to the earnings on 403b elective deferrals....