The economy doesn’t seem to be improving, and hardship distributions from 401(k) plans continue to be taken. A few months ago I posted, Hard Times Mean More 401(k) Hardship Distributions.
I’m revisiting this matter again to point you to how to make hardship distributions correctly as discussed in the IRS’ Summer 2009 Edition of Retirement News for Employers.
Here are the highlights of the IRS’ 7 steps to making hardship distributions:
- Review the terms of your plan.
- En sure that the employee complies with the plan’s procedural requirements.
- Verify that the employee’s specific reason for hardship qualifies for a distribution using the plan’s definition of what constitutes a hardship.
- If the plan, or any of your other plans in which the employee is a participant, offers loans, document that the employee has exhausted them prior to receiving a hardship distribution.
- Check that the amount of the hardship distribution does not exceed the amount necessary to satisfy the employee’s financial need.
- Make sure that the amount of the hardship distribution does not exceed any limits under the plan and is made only from the amounts eligible for a hardship distribution.
- If the plan has a provision that the employee taking a hardship distribution is suspended from contributing to the plan for at least 6 months, make sure to enforce that provision.
Basic, yes. Practical, very. Here is a link to the complete article, 7 Steps to Making a Hardship Distribution (PDF).