Blog

Contact Us for More Information

401(k) Safe-Harbor Hardship Distributions: Best Practices & Checklist

Posted by Paul D. Woodard | Mar 03, 2017 | 0 Comments

Contributing Author: Kristine M. Custodio, Advanced Certified Paralegal

Are you following the best practices when it comes to your employees' 401(k) safe-harbor hardship distributions? Should your 401(k) plan ever come under audit by the Internal Revenue Service, your documentation will be critical to a swift resolution of the examination. In general, the following are best practices which can also serve as a helpful checklist for tracking 401(k) safe-harbor hardship distributions:

1. Are you providing proper notice to your employees taking 401(k) safe-harbor hardship distributions?

 Generally, the following information should be provided by the employer to the employee related to hardship withdrawals:

  • The hardship distribution is taxable and additional taxes could apply.
  • The amount of the distribution cannot exceed the immediate and heavy financial need.
  • Hardship distributions cannot be made from earnings on elective contributions or from qualified nonelective contribution (QNEC) or qualified matching contributions (QMAC) accounts, if applicable.
  • The recipient agrees to preserve source documents and to make them available at any time, upon request, to the employer or administrator.

2. Are you keeping proper documentation related to all hardship requests?

 The proper documentation should include the following:

  • Participant's name
  • Total cost of the event causing hardship (for example, total cost of medical care, total cost of funeral/burial expenses, payment needed to avoid foreclosure or eviction)
  • Amount of distribution requested
  • Certification by the participant that the information provided is true and accurate

3. Are your employees taking 401(k) safe-harbor hardship distributions that constitute deemed hardships?

 Whether a need is immediate and heavy depends on the facts and circumstances. However, certain expenses are deemed to be immediate and heavy, including:

  • Medical Care: Expenses for medical care are deductible under section 213(d) for the employee or the employee's spouse, children or dependents (as defined in section 152) or primary beneficiary under the plan;
  • Purchase of Principal Residence: Costs directly related to the purchase of a principal residence;
  • Educational Payments: Payment of tuition, related educational fees, room and board expenses for up to the next 12 months of post-secondary education for the employee or the employee's spouse, children or dependents (as defined in section 152) or primary beneficiary under the plan;
  • Foreclosure/Eviction from Principal Residence: Payments necessary to prevent the eviction of the employee from the employee's principal residence or foreclosure of the mortgage on that residence;
  • Funeral and Burial Expenses: Payments for burial or funeral expenses for the employee's deceased parents, spouse, children or dependents (as defined in section 152) or primary beneficiary under the plan; or
  • Repairs for Damage to Principal Residence: Expenses for the repair of damages to the employee's principal residence that would qualify for the casualty deduction under section 165.

 If you have questions about hardship withdrawals, contact the attorneys at Butterfield Schechter LLP for more information about the options available to you.  

About the Author

Paul D. Woodard

Paul Woodard practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Estate Planning.

Comments

There are no comments for this post. Be the first and Add your Comment below.

Leave a Comment

Retirement Plans

We help establish a customized plan that meets regulatory requirements as a tax qualified plan. Following implementation, our attorneys can assist clients and their plan administrator with regular reviews and updates to help with regulatory compliance for the plan's operation, and continued effectiveness in meeting the client's specific goals.

ESOPs

We are dedicated to employee ownership. When you come to us for ESOP services, you receive influential legal counsel who stand beside you to help you stay informed, in compliance, and abreast of the latest developments-all to help you realize your plan goals as fully and effectively as possible.

QDROs

A QDRO is a specially designed court order that is required for the division of retirement benefits in a family law case. Many family law attorneys do not possess the expertise necessary to divide retirement benefits or stock options upon divorce. We have extensive experience in dividing qualified plans, government plans, IRAs and stock options between the employee spouse and non-employee spouse.

Butterfield Schechter LLP provides the information in this website as a service to its clients and visitors to the site. This website is for information purposes only and is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The information in this website is provided "as is," and while the information in this website is updated periodically, additional facts or future developments may affect subjects contained herein, and no guarantee is given that the information provided is correct, complete, or up-to-date. Seek the advice of professional counsel before acting or relying upon any article, form, or information in this web site. To ensure compliance with the requirements imposed by the United States Treasury and the Internal Revenue Service, we inform you that any federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of: (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another person any transaction or matter addressed herein. Butterfield Schechter LLP has endeavored to comply with all known legal and ethical requirements in compiling this website. In the event that this communication does not conform with any laws or regulations of any state or country in which it may be received, Butterfield Schechter LLP will not accept legal representation based on this communication from a person in such a state or country. Electronic mail is provided as a convenience in communicating with the attorneys at Butterfield Schechter LLP. Contact by e-mail does not alone create an attorney-client relationship. Please remember Internet e-mail is not secure and messages sent to the firm or any of its employees or attorneys should not contain sensitive or confidential information. Thank you for visiting our site.

Menu