403(b) Rescue, the Ekon Benefits 403(b) Fix-It Series, describes the most common mistakes in 403(b) plans as determined by the IRS. We provide explanations of common mistakes, suggested prevention methods, and options for correction.

Common Mistake #3: Hardship Distributions

For a distribution to be considered a hardship distribution by the IRS, it must:

• be used to satisfy an “immediate and heavy financial need”, and
• not be in excess of the amount required to satisfy the “immediate and heavy financial need”

If hardship distributions are permitted in the Plan, the Plan Document must contain language regarding their availability. The plan sponsor must maintain documentation of the participant’s request, eligibility, the amount distributed, and the procedures followed. Plans may rely on participant self-certification that a financial need exists and that no other resources are reasonably available, but must retain evidence of the certification and compliance with procedural rules.

IRS-recognized “safe harbor” reasons for taking a hardship distribution include:

• Unreimbursed medical expenses previously incurred by the employee, spouse, children, or dependents
• Costs directly related to the purchase of the employee’s primary residence
• Payments necessary to prevent eviction or foreclosure on the employee’s primary residence
• Post-secondary tuition, fees, and room and board expenses for the employee, spouse, children, or dependents
• Certain expenses for repairs to the employee’s primary residence due to casualty loss
• Funeral expenses for the employee’s spouse, parent, child, or dependent
• Expenses and losses incurred due to a federally declared disaster, if the participant lives or works in the disaster area

This is a safe harbor list; plans may allow hardship distributions for other reasons if the plan permits and the need meets the “immediate and heavy” standard. Also, if the financial need could be fulfilled by a resource reasonably available to the participant, the hardship is not permissible.

Reasonably available resources may include:

• Reimbursement by insurance
• Liquidation of personal assets
• Cessation of elective deferral contributions to the Plan
• Nontaxable loans

If hardship distributions were made improperly—such as without supporting documentation, in excess of need, or when not permitted by the plan document—they must be corrected under the Employee Plans Compliance Resolution System (EPCRS). If the plan document does not permit hardship distributions but they occurred operationally, a retroactive plan amendment may be permitted under VCP. If a distribution exceeds the permitted amount, correction may involve a repayment to the plan, along with possible tax consequences.

For a complete listing of the most common listing of the most common 403(b) mistakes, please view the IRS 403(b) Plan Fix-It Guide. For assistance in correcting a plan error, please contact Ekon Benefits at (314)367.6555 or info@ekonbenefits.com.