This section provides answers for frequently asked questions from plan sponsors, investment advisors, and recordkeeping platforms. This section could have 100 questions/answers, therefore if you do not find your answer here, please contact your ERISA Consultants for your plan specific question.
Is federal withholding required for hardship withdrawals?
10% federal withholding is required if the participant does not waive or indicate otherwise.
Recordkeeping service providers are split on the approach used on distribution forms for hardship withdrawals:
- A check box is provided indicating that they waive the 10% required federal withholding (with words that indicate if they want federal withholding they need to state the amount)
- 10% is automatically held unless they indicate otherwise (in other words this is simply a statement that the 10% withholding is required)
Can Roth monies be included in the hardship withdrawal?
From the perspective of a hardship distribution availability, the Roth feature is treated no different than the traditional salary deferral. Hence a hardship withdrawal availability is based on the basis (his total contributions) and of course the hardship must meet the criteria.
That’s the good news … now for the complicated somewhat bad news on the Roth …
If Roth deferral monies are included as part of the hardship withdrawal, the Roth monies will not have been in the plan for five years; hence this is not a qualified Roth distribution so a portion of the hardship will include earnings which will then be subject to income tax and penalties. In other words, the Roth deferral monies are available for a hardship, but they are not as flexible as the traditional deferral until the participant has been deferring Roth monies for 5 years. I know, a complicated answer to an easy question. Every plan with the Roth feature has this issue until the year 2011!
What is a qualified Roth distribution (or the qualified event rule)?
In summary, Roth monies must remain in the plan for 5 years. The definition of a qualified Roth Distribution is a distribution that is made after the end of the applicable 5-year tax period AND is for a qualified purpose. This is known as the qualified event rule. The applicable 5-year period starts in the first year the participant made a Roth deferral.
The government put in this provision most likely to avoid the revolving door on Roth monies since they are going into the defined contribution plan after tax and the earnings will not be taxed at distribution (assuming they meet the qualified event rule). If the Roth 401(k) monies coming out of the plan do not meet the ‘qualified event rule’, the earnings on the Roth portion are subject to tax and the penalties (similar to the traditional salary deferral monies). The contribution portion is not taxed.
Are RMD (required minimum distributions) required for calendar year 2009 distributions?
They are not required but participants can continue to take their annual calculated RMD. Contact your recordkeeping service provider/platform as they may have participants set-up with automatic recurring distributions.
This was a one-time event as this was enacted to help retirees conserve their account balances related to the stock market downturn in 2008. Make sure you work your recordkeeping service provider in 2010 to ensure accurately and timely RMD distributions!
What is the maximum amount available for a hardship withdrawal?
Technically the participant is limited to the hardship withdrawal basis (which is the contribution portion only). Certain plan documents allow rollover, company match/profit sharing monies (monies must have been in the trust for two years ) as part of the hardship amount (albiet these are technically in-service distributions).
Safe harbor contributions, QNEC's, and QMAC can not be included in this calculation.
If the participant has been in the plan since pre 1989, their maximum hardship withdrawal from the 401(k) portion includes earnings on any deferrals made pre-1989. Hence the 401(k) calculation for hardship available includes:
- 401(k) contributions post 1989
- 401(k) value as of December 31, 1989
- The total of the above minus any prior withdrawals
The content of this website is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances.