Facts
A participant in our 401(k) plan recently took a hardship distribution. We know we are supposed to suspend his deferrals for six months following the distribution, but we are not entirely clear on how strict that timing is and what happens at the end of the six months.
Question
How important is it that we start the suspension immediately and what does the participant have to do if he wants to start deferring again at the end of the suspension period?
Answer
The general rule is that deferrals should be suspended immediately following the date the participant takes the hardship distribution. With that said, there is some flexibility to account for administrative processing time.
Many payroll providers require payroll changes be submitted a certain number of days before the pay date to which they apply. If we assume that lead time is five business days before a pay date but you only find out about a participant’s hardship distribution three days ahead of time, there is obviously no way to get the suspension in place for that pay date. In that scenario, starting the suspension with the next pay date should be acceptable. However, barring some quantifiable administrative delay, it is expected that the suspension would begin immediately.
It is important to remember that if there is an administrative lag in the start of the suspension period, the six months is measured from that delayed start date rather than the actual date of the distribution. That brings us to what happens at the end of the suspension period. A participant requesting a hardship distribution is not the same as a participant choosing to stop deferring for six months. So, unless there is some guidance to the contrary, that participant’s deferrals should automatically resume at the end of the suspension period.
The plan document and the hardship distribution form are both places where additional direction might be found. For example, the plan document might include language that says a participant who requests a hardship distribution is deemed to also elect to discontinue deferrals and that he or she is free to elect to resume deferring any time after the six-month suspension period ends. That puts the onus back on the participant to make a new election rather than requiring the company to remember to automatically start deferrals again. If there is nothing in the document, the hardship distribution form might contain similar language.
Fortunately, this whole suspension issue will be a thing of the past. Thanks to a provision slipped into a government spending bill, the six-month suspension is no longer required beginning with the 2019 plan year. A plan amendment will likely be required to implement that change, so stay tuned for more information on that later this year.
You can learn more information about hardship distributions here and here.
