Hardship Withdrawal From 401K/Profit Sharing

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
EMDW
Posts: 79
Joined: Thu Jul 04, 2013 11:18 am

Hardship Withdrawal From 401K/Profit Sharing

Post by EMDW » Thu Jul 10, 2014 10:55 pm

An colleague wants to withdrawal from his pretax deferrals in a 401k plan. The plan requires at least 1000 hours a year to move up on the vesting ladder. The plan states "if you take a hardship distribution, you may not contribute to the plan or other qualifying company plans for 6 months". Does the 6 months of disqualification sound typical for most plans?
Example: pre-tax deferrals = 100%. Profit sharing = 80%. Safe harbor non-elective = 100%.
Thank you.

realmford
Posts: 6
Joined: Fri Jul 11, 2014 7:52 am

Re: Hardship Withdrawal From 401K/Profit Sharing

Post by realmford » Fri Jul 11, 2014 7:57 am

Yes, the 6 month period of ineligibility is common and standard in most plans. Usually following any type of loan or hardship withdrawal.

User avatar
sans souliers
Posts: 177
Joined: Sun Apr 08, 2012 1:38 pm
Location: By the Quinnipiac

Re: Hardship Withdrawal From 401K/Profit Sharing

Post by sans souliers » Fri Jul 11, 2014 8:01 am

The 401(k) plan I was in had the same stipulation.
Sometimes pessimism leaves me pretty well prepared for when things don't go my way, and pleasantly surprised when they do.

mah001
Posts: 302
Joined: Fri Sep 28, 2012 9:30 am

Re: Hardship Withdrawal From 401K/Profit Sharing

Post by mah001 » Fri Jul 11, 2014 8:30 am

Suspending deferrals for at least 6 months is currently an IRS requirement. See Publication 7335, last paragragh of item VII b.

placeholder
Posts: 4023
Joined: Tue Aug 06, 2013 12:43 pm

Re: Hardship Withdrawal From 401K/Profit Sharing

Post by placeholder » Fri Jul 11, 2014 9:45 am

It's an extremely bad idea regardless of the suspension of matching because not only will federal and potentially state be due it also will have a 10% penalty (and lose protection from bankruptcy) so your friend would be better off getting money in some other fashion.

User avatar
grabiner
Advisory Board
Posts: 25639
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Hardship Withdrawal From 401K/Profit Sharing

Post by grabiner » Sat Jul 12, 2014 3:05 pm

realmford wrote:Yes, the 6 month period of ineligibility is common and standard in most plans. Usually following any type of loan or hardship withdrawal.
Not necessarily following a loan, which makes it better than a hardship withdrawal if allowed. However, if you take a loan, you must repay the loan, so you will lose the employer match unless you contribute more than enough to repay the loan. (And if you can't pay back the loan, or leave the employer, the loan turns into a taxable distribution and you pay tax and penalty on it, just as if you had withdrawn the balance.)
Wiki David Grabiner

mah001
Posts: 302
Joined: Fri Sep 28, 2012 9:30 am

Re: Hardship Withdrawal From 401K/Profit Sharing

Post by mah001 » Sat Jul 12, 2014 4:02 pm

I agree a loan is better if it's feasible. Part of hardship requirements is to consider a possible loan first, unless doing so increases the hardship. I've never heard of a plan requiring a 6 month suspension of elective deferrals following a loan, but it's a requirement following a hardship distribution.

OP indicates a 'nonelective' safe harbor contribution, which means employee loses no employer money. All participants get the prescribed nonelective contribution, e.g. 3% of pay. Nonelective means the employer money is not contingent upon employee having to make any elective deferral at all. Similarly, if there's a profit-sharing contribution, the employee has lost nothing in employer money, whether it's a loan or a hardship.

Note that some but not most plans are written and operated so that a person could terminate employment and keep making loan payments, thereby delaying taxability of the unpaid loan balance.

Not sure of relevance of OP's original info, "It takes a thousand hours to move up on the vesting ladder."

Topic Author
EMDW
Posts: 79
Joined: Thu Jul 04, 2013 11:18 am

Re: Hardship Withdrawal From 401K/Profit Sharing

Post by EMDW » Sat Jul 12, 2014 5:50 pm

mah001 wrote:I agree a loan is better if it's feasible. Part of hardship requirements is to consider a possible loan first, unless doing so increases the hardship. I've never heard of a plan requiring a 6 month suspension of elective deferrals following a loan, but it's a requirement following a hardship distribution.

OP indicates a 'nonelective' safe harbor contribution, which means employee loses no employer money. All participants get the prescribed nonelective contribution, e.g. 3% of pay. Nonelective means the employer money is not contingent upon employee having to make any elective deferral at all. Similarly, if there's a profit-sharing contribution, the employee has lost nothing in employer money, whether it's a loan or a hardship.

Note that some but not most plans are written and operated so that a person could terminate employment and keep making loan payments, thereby delaying taxability of the unpaid loan balance.

Not sure of relevance of OP's original info, "It takes a thousand hours to move up on the vesting ladder."

My understanding is that there will be no employer match of the 3% of pay during the 6 months when he is not contributing the the plan, but will qualify for any profit sharing at the end of the year? The 1000 hours is required for part time workers to qualify for vesting.

mah001
Posts: 302
Joined: Fri Sep 28, 2012 9:30 am

Re: Hardship Withdrawal From 401K/Profit Sharing

Post by mah001 » Sat Jul 12, 2014 8:04 pm

You said there's a 'nonelective safe harbor' contribution. Unless there's a mistake in terminology, that means the participant gets at least 3% of pay from the employer. Employee contribution is not required. Now there could be additional matching based on deferrals, which would be lost. Profit sharing would be based on compensation. See the plan document.

See the IRS Alert Guideline #12 referred to earlier. I've not read it recently, but it seems to have the most important specs for hardships in there.

See IRS Alert Guidelines, Worksheet and Publication #11, Part VII for particulars of safe-harbor plan. IRC section 401(k)(12).

See Alert Guideline Worksheet and Explanation #2 on Defined Contribution plan to see vesting specs. Yes, most plans require 1,000 hours of service during the 'vesting computation period,' in order to earn a 'year of service' for vesting. People might want to check if their plan allows for a two-fer: This could occur for example, if someone starts employment on May 15, the plan year ends 6/30, the plan says the first vesting year is based on your date of hire, and then it switches to the plan year. By 6/30 of the next year, the employee has 2 years of vesting service. As far as I know, this is much more typical than not.

placeholder
Posts: 4023
Joined: Tue Aug 06, 2013 12:43 pm

Re: Hardship Withdrawal From 401K/Profit Sharing

Post by placeholder » Sun Jul 13, 2014 1:02 am

grabiner wrote:And if you can't pay back the loan, or leave the employer, the loan turns into a taxable distribution
That depends on the particular plan rules as there is no law or regulation requiring that and in fact some plans don't.

placeholder
Posts: 4023
Joined: Tue Aug 06, 2013 12:43 pm

Re: Hardship Withdrawal From 401K/Profit Sharing

Post by placeholder » Sun Jul 13, 2014 1:04 am

My plan requires exhausting other funds in the account before hardship so employer match or after tax would need to be withdrawn first (not sure if that's a plan feature or the law).

Topic Author
EMDW
Posts: 79
Joined: Thu Jul 04, 2013 11:18 am

Re: Hardship Withdrawal From 401K/Profit Sharing

Post by EMDW » Sun Jul 13, 2014 12:54 pm

placeholder wrote:My plan requires exhausting other funds in the account before hardship so employer match or after tax would need to be withdrawn first (not sure if that's a plan feature or the law).
This plan doesn't allow for loans.

placeholder
Posts: 4023
Joined: Tue Aug 06, 2013 12:43 pm

Re: Hardship Withdrawal From 401K/Profit Sharing

Post by placeholder » Sun Jul 13, 2014 8:51 pm

sari wrote:
placeholder wrote:My plan requires exhausting other funds in the account before hardship so employer match or after tax would need to be withdrawn first (not sure if that's a plan feature or the law).
This plan doesn't allow for loans.
I think you meant this is response to some other post because I was discussing withdrawals in this one not loans.

Post Reply