Second 401K Covid Hardship Withdraw?? Can it be done?

Hi All,

New here.   About 4 months ago I took out a COVID related 401K hardship withdraw through my employer.    It was for $28,000.    I took a large pay cut and my wife lost her job.   It helped greatly but I worry about the future and would like to take a 2nd withdraw for the amount of $13,000.   It pains me to do it, but I want to be better safe than sorry.    My question is, is a second withdraw even possible?    I understand the max amount is $100,000 and my wife is still out of work and I am still at a lower wage.      I also totally understand all the tax repercussions involved in withdrawing the money early.    

I plan on talking to my employer about this, but was looking for a little outside input first.   

MikeOD, to take a traditional "hardship" withdrawal, assuming your employer's plan has that feature, you have to have a specific need for the funds that is recognized as a "hardship." The plan will have a limited list of acceptable hardships, including medical expenses, imminent eviction or foreclosure, etc. Should be explained in the plan's Summary Plan Description, or "SPD." And then the amount of your withdrawal has to be matched to the amount you need to meet the specific hardship. If you previously took a traditional hardship withdrawal, that fact alone should not bar you from taking another one, unless your plan specifically limits the number of hardship distributions that you can take, which would be unusual. But you would need to go through your plan's traditional hardship withdrawal process of claiming to have a recognized hardship, representing that the amount you want to withdraw is the amount that you need for the hardship, etc.

CARES Act/Covid-19 distributions are much more flexible and of limited duration (you must receive before December 31, 2020). For Cares Act Distributions ("CRDs," for "Corona virus related"), you or someone in your family/household must have been negatively affected economically by Covid, and it sounds like you meet that requirement. The amount you withdraw, is limited to a total of $100k, but is not required to be matched to any specific immediate need for funds.

If your employer has amended its plan to permit in-service distributions under the CARES Act rules, then you should be able to get an additional distribution, as a CRD, subject to other detailed facts and circumstances. If your employer has not changed its plan to permit in-service CARES Act distributions, then you will need to have a distributable event, such as termination of employment or attaining an advanced age, in order to receive a distribution. Plans are not uniform regarding when the permit distributions, so I cannot predict whether you will be eligible under your plan. If you have no distributable event, then you will need to explore getting another distribution from your plan based on the traditional hardship rules, which are less flexible, as previously explained, and subject to less generous tax rules. The tax rules for both traditional hardship distributions and CRDs are explained on the IRS's website.

There is nothing that I aware of that limits the number of COVID distributions you can take in 2020 if you are a qualified individual though your plan may impose tighter restrictions. The only thing that is limited this the amount which is capped at $100,000 from all COVID distributions that you take. So I agree with Luke, you should probably be able to take another one if you need the funds.

A slightly different situation, but sort of the same issue...  A Plan Sponsor has had an active employee take three CRDs thus far and just requested his fourth.  The trustee suspects that the employee is abusing the self-certification aspect.  Without any additional guidance specific to this (that I can find), I hesitate to get too creative.  But, the plan sponsor is obviously (and understandably) concerned. 

Let’s say the plan hasn’t had any other participants elect more than four COVID-related distributions:  Plan Sponsor could process this fourth request for the participant, but add a simple Procedure addendum to their SPD and retain a copy in his plan document files indicating, “Although the plan has elected to make COVID-related distributions under the CARES Act, the Plan Sponsor also imposes a limit of no more than four COVID-related hardship distributions by all participants in addition to limits specified in the CARES Act.”  

In practice, he would not be discriminatory.  Your thoughts on that idea..?

1 hour ago, Puffinator said:

Let’s say the plan hasn’t had any other participants elect more than four COVID-related distributions:  Plan Sponsor could process this fourth request for the participant, but add a simple Procedure addendum to their SPD and retain a copy in his plan document files indicating, “Although the plan has elected to make COVID-related distributions under the CARES Act, the Plan Sponsor also imposes a limit of no more than four COVID-related hardship distributions by all participants in addition to limits specified in the CARES Act.” 

Puffinator, I think eventually you would have to do a plan amendment (that could be in the form of a resolution) to back that up, but I think it is within the employer's power to do that under the statute, i.e. you don't have to do CARES distributions at all, you can limit in amount, etc.

Having said that, I don't see what the concern is. The bar is very low. Will the person certify that one of the conditions occurred? Your hypothetical facts say "yes." It does not need to be a fresh concurrence, so if they qualified once, they qualify through December 30. And they could have just taken out a larger amount originally. Putting the best face on it, the participant was trying to limit how much they borrowed from their future, and unfortunately they need more money than they would have hoped.

Thanks for sharing your thoughts on it, Luke.  I definitely agree with you.  The Plan Sponsor, however, is genuinely concerned.  For all we know, his fears are valid...  Possibly the grapevine let it be known the Participant openly told other employees he is taking advantage of the opportunity to take funds (but is/has not been directly affected per guidance listing applicable circumstances).  One employee tells another how to work the system and all of a sudden you have a slew of requests that may or may not be on the up and up...

 Regardless, I think context matters:  This plan sponsor is very pro-participant and has consistently shown he bases all decisions on whether or not something helps the employees.  He genuinely wanted to elect CRDs to help his employees if they needed it.  If he has suspicion this participant might be false in his self-certifications, then it’s VERY there is good reason to be suspicious.  

We posed the question to our document provider’s legal team.  Their opinion is that the plan sponsor can impose limit as long as it is non discriminatory.  They also agreed that having a written procedure, much like loan procedures, is best.  Our internal document specialist also wants to issue an SMM for timely delivery to participants.  We suggested the plan sponsor process this 4th request for the participant (because as the scenario you described [of needing more than anticipated] also crossed our minds as logically possible) prior to plan sponsor imposing a limit on total number of CRD requests per participant (4).   Seems to be a reasonable compromise for all involved.