i have a client that wants to allow a $1,500 hardship w/d from a 401(k) plan for an employee to purchase a vehicle. i have advised against this but my client is insisting that the hardship is that the employee needs to get to work. has anyone ever heard of this before? also, you do withhold the 20% fed tax on hardships, correct?

thanks for any help...

Depends on what the plan document says....(Don't you love that answer??)

If the plan uses a safe harbor definition for hardships, then no way does this qualify.

If they use facts and circumstances, then it may be possible. They should have something in writing stating how a hardship is determined (what criteria a participant needs to meet). They need to be very careful using the facts and circumstances because they need to apply it uniformly to all participants. If they grant Joe Schmoe a hardship to buy a car, they should be prepared to do the same for all participants in similar circumstances.

Hardships are not eligible for rollover, therefore are not subject to the mandatory 20% fed withholding.

they do use facts and circumstances. if they choose not to have fed taxes withheld, they will still get a 1099R at end of year and have to pay taxes then, correct?

thanks for your help.

Both taxes and a 10% early distribution tax if they are under 59 1/2.

Also, depending on the relationship between the distribution and earned income (I assume this person is very low paid), they may run into trouble of not having enough withheld for the year (100% of prior year's tax liability or 90% of current year) and be subject to more penalties and interest. The way to correct this is to actually withhold on the distribution, increase their withholding on earned income, or file quarterly estimated taxes.

Back when only deferrals were ineligible for rollover, Notice 99-5 said that if another legal event occurred - such as age 59 1/2, then the deferrals were eligible for rollover, even if distributed as a hardship.

Notice 2000-32 said that this treatment was optional, pending further guidance.

What do people think about a hardship distribution these days - from mixed deferrals and profit sharing sources - to someone over 59 1/2. Eligible for rollover because over 59 1/2 or not eligible for rollover because of hardship?

why not gross up the amount so that they get the $1,500 and have the proper tax withheld?

It's not often (if ever) someone asks what I think.....



This may be to simplistic of a view.....

If the participant is over 59 1/2 and the plan does not allow for in-service upon reaching 59 1/2, but does allow hardship distributions....not eligible for rollover

If the plan allows in-service upon attaining 59 1/2, I would have the participant complete the appropriate paperwork and request this distribution rather than a "hardship", making it eligible for rollover.