Are you considering allowing 401(k) plan participants to take hardship distributions?

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

I have had a few clients that have recently elected to offer hardship distributions to their employees in the past few years.  Anytime I see this new election, I like to sit down and go over expectations with the plan fiduciary.  There are a few major questions I like to throw out to my client:

• Do you understand what qualifications to look for when a participant turns in a hardship distribution request? What does your plan document state the reasons for a hardship distribution are? What are the regulations set forth by the government for a hardship distribution?

• Do you know what documentation to receive from the employee when they elect to take a hardship distribution? What will your procedures be for obtaining the adequate documentation to show an employee hardship?

• Do you have procedures in place to stop the employee’s elective deferral for 6 months (or to do whatever it states should be done after a hardship distribution in the plan document)?

• What is the procedure after the 6 month suspension? Will you automatically restart the deferrals at their prior elections or will it be up to the participant to sign up to defer again? Has this been communicated to the participant?

Hardship distributions have a few more requirements for the plan fiduciary to look out for than a normal distribution might have and it is important that they understand each of my bullet point questions above in order to properly follow the requirements that are in place.

For more information on hardship withdrawals, visit the IRS website’s FAQs regarding hardship distributions.

Shelby Williams