Atlanta, Georgia
Treasury Regulations provide that a 401(k) plan may distribute
amounts to a participant in the event of a financial hardship. A financial hardship generally exists if a
distribution is necessary to satisfy an immediate and heavy financial
need. Under prior safe-harbor
provisions, a distribution would be deemed made on account of an immediate and
heavy financial need if certain requirements were met. One requirement was that the participant
could not make elective deferrals and other employee contributions to the plan
for a period of at least 12 months. Another
requirement was that the plan had to limit the employee's elective deferrals
for the year following the year of the hardship distribution to the elective
deferral limit under Code Section 402(g) reduced by the employee's
contributions during the year of the hardship distribution.
EGTRRA modified these requirements. A plan may now reduce the suspension period from 12 months to six
months and eliminate the post-hardship contribution limit beginning in 2002.
These changes are discretionary, except for 401(k) plans designed to meet the
safe-harbor matching contribution provisions of Code Section 401(k)(12) or
401(m)(11), which exempt such plans from ADP and ACP testing. Notice 2001-56 provides that safe-harbor
401(k) plans must apply these changes after December 31, 2001 in order to
continue to rely on this exemption.
Thus, for example, for 2002, a safe-harbor 401(k) plan may not apply the
post-hardship contribution limit to participants who received hardship
distributions in 2001.
Notice 2001-57 provides a sample good faith amendment that a plan
sponsor can use to implement the new suspension period. Plan sponsors generally must adopt good
faith amendments no later than December 31, 2002 for calendar year plans.
If a plan adopts a timely good-faith amendment to reduce the
suspension period, then such plan will be deemed to have adopted a good faith
amendment to eliminate the post-hardship contribution limit, even if it is not
specifically mentioned in the amendment.
However, if the sponsor does not adopt a good faith amendment changing
the suspension period, then the sponsor must adopt a good faith amendment
eliminating the post-hardship contribution limit in order to take advantage of
the EGTRRA remedial amendment period.