A 401(k) plan may allow employees to receive a hardship distribution because of an immediate and heavy financial need.Hardship distributions from a 401(k) plan are limited to the amount of the employee’s elective deferrals.Plan provisions don't allow for hardship distributions.Employer L made hardship distributions to some employees during the 20-plan years.Qualified nonelective contributions (QNECs) and/or qualified matching contributions are typically made to correct failed Actual Deferral Percentage (ADP) or Actual Contribution Percentage (ACP) tests.Other amounts under the plan, if any, such as regular matching contributions and discretionary profit-sharing contributions may also be distributed on account of hardship if the plan so provides.
It’s important that you keep a record of all information used to determine whether a participant was eligible for a hardship distribution and the amount distributed was the amount necessary to alleviate the hardship.
Voluntary Correction Program: Employer L may also correct the mistake under VCP per Revenue Procedure 2016-51 if the plan is not under audit by adopting a retroactive plan amendment, effective January 1, 2014, to provide for the hardship distributions it made available.
The amendment must provide that the plan make the hardship distribution option nondiscriminatory.
If L determines it has established practices and procedures in place to promote the overall compliance of their plan, it may correct the mistake under SCP.
Although, in general, correction of an operational error through plan amendment isn't permissible under SCP, the provision of hardship withdrawals under the plan in a nondiscriminatory manner is one of four instances in which EPCRS allows a corrective amendment under SCP.