MARCH 2009 Pension Plan tip of the month...

Hardship Distributions

In these uncertain economic times, we have noticed an increase in the number of participants requesting hardship distributions from their retirement plans. The IRS provides for certain, limited situations that qualify as an immediate and heavy financial need that would allow for a hardship distribution.  It is very important that plan sponsors verify that these requests meet one of the safe harbor reasons.

Your plan’s document may or may not allow for hardship distributions. If you receive a request from a participant, you should review your plan document or confirm with your Paragon Account Executive that your plan allows for hardship distributions. Plan documents that were written by The Paragon Alliance Group will indicate that a participant must qualify under the IRS Safe Harbor reasons before a hardship distribution can be approved. If you are using a plan document not written by us, the “facts and circumstances” reasons may have been chosen. The plan document will also detail which sources are allowed to be withdrawn.

The IRS Safe Harbor reasons allow hardship distributions only if they qualify as an immediate and heavy financial need under the following qualifying events:

• medical expenses which you, your spouse or dependents incur or necessary for you, your spouse or dependents to obtain medical care. These must be expenses described in Section 213 of the Internal Revenue Code;
• to purchase your principal residence;
• to pay tuition, related educational fees, and room and board expenses for the next twelve (12)
• months of post-secondary education for you, your spouse, children or dependent;
• to prevent your eviction from your principal residence or the foreclosure on your principal residence;
• funeral expenses of parent, spouse, children or dependents; or
• certain expenses relating to the repair of damage to your principal residence that would qualify for the casualty deduction, such as those resulting from hurricane or flood damage.

Also, in order to qualify for a withdrawal using the Safe Harbor determination, the following conditions must be met:

• the hardship distribution made must not be in excess of the immediate and heavy financial need (A participant may add the federal taxes and penalties to the amount being withdrawn.);
• they have already obtained all distributions (other than a hardship distribution) and non-taxable loans, to the extent available, from all plans sponsored by the Employer (unless the loan would be counterproductive);
• they agree not to make salary reduction contributions for a six month period after  receiving the hardship distribution

Be certain if the participant does, in fact, qualify for one of the hardship reasons above, to obtain and maintain the appropriate back-up documentation regarding the hardship. Please be aware that hardships are not eligible for rollover.  The participant may elect federal withholding on the hardship distribution or may opt out of withholding.  If no election is made, 10% will be withheld on the taxable portion.  In addition, an early withdrawal penalty of 10% also applies if the participant is under age 59.5.  A participant may add the tax due and the penalty amount to the hardship amount being requested.