(b)lines Ask the Experts – When Hardship Suspensions Start

I realized that, per our retirement plan safe harbor provisions for hardship distributions, elective deferrals from all of our retirement plans are to be suspended for six months following the hardship withdrawal.

“But what is the specific date that the 6-month suspension period should begin? When the vendor received the hardship distribution paperwork from the employee? When the vendor issues the hardship distribution check? When the employee receives the hardship distribution check?” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:        

As with many questions posed to the Experts, the best way to seek an answer to your question is to take a look at the applicable regulations. The applicable regulation in this case is Treas. Reg. §1.401(k)-1(d)(3)(iv)(E)(2), which states the following:

“(2) The employee is prohibited, under the terms of the plan or an otherwise legally enforceable agreement, from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution.” (boldface our emphasis)

Thus, it appears to the Experts that the regulation is clear; the 6-month suspension period begins on the date the participant receives the hardship distribution. However, the Experts also realize that the plan sponsor and/or recordkeeper will likely will not know the precise date that the participant receives the distribution check in the mail (although if funds are distributed electronically, the recordkeeper will know the date of receipt by the participant in that case).

Thus, the plan sponsor and recordkeeper should work together to ensure that an operating procedure is in place so that the suspension of elective deferrals commences as close to the actual receipt date of the distribution by the participant as possible. Since that date is unknown for paper check disbursements, the date of disbursement can be substituted for the date of receipt. As long as such an operating procedure is in place and is followed, the plan should be able to fully comply with this particular provision of the hardship safe harbor.


NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.