|
|
|
| Issue: |
Sadly, many victims of Hurricane Katrina have been left with no homes, no food and no money. Affected employees may wish to tap into their 401(k) plan funds as they heal and rebuild. What are their options? |
 |
|
|
Answer: |
In times of trouble, funds from 401(k) plans may be accessed through either hardship distributions or loans.
Hardship distributions. A 401(k) plan may authorize hardship distributions if the participant has an “immediate and heavy financial need” and other resources are not reasonably available to meet that need. Hardship distributions from a 401(k) plan may not be made at the discretion of the employer, but must be authorized by the plan and made in accordance with plan terms. Specifically, the plan must set forth nondiscriminatory and objective standards for determining whether a participant has incurred an immediate and heavy financial need and the amount of the distribution required to satisfy that need. An employer that makes hardship distributions that are not authorized by the plan risks disqualification of the plan. However, the IRS allows for the correction of this operational failure through the adoption of a retroactive plan amendment.
The amount available for hardship withdrawal is generally limited to the employee's total elective contributions as of the date of the distribution, reduced by the amount of any prior hardship distribution. Note that there generally are negative tax consequences when distributions are made from 401(k) plans.
Loans. Taking a loan from a 401(k) plan funds is a less aggressive alternative. Plan loans, however, typically are not without cost to employees. In addition to set-up costs and other administrative fees, an employee must repay the loan, with interest, even if he or she terminates employment. Before adopting a loan program, employers need to be aware of restrictions imposed by the Internal Revenue Code and ERISA that are designed to assure that loans are true loans and not disguised distributions. Generally:
- Loan terms must be set forth in a written and legally enforceable agreement;
- Loan amounts may not exceed the lesser of $50,000 (reduced by previous outstanding loans) or one-half of the present value of the participant's nonforfeitable accrued benefit;
- Terms of the loan (other than principal residence loans) must require repayment within five years; and
- The loan must be amortized on a substantially level basis with payments made no less frequently than quarterly.
In addition, loans to participants must be available to all participants or beneficiaries on a reasonably equivalent basis; not be available to highly compensated employees in an amount greater than the amount made available to other employees; be made in accordance with specific plan provisions; bear a reasonable rate of interest; and be adequately secured.
Source: CCH U.S. Master Pension Guide |
|
|
