PenServ Plan Consultants understand that no two clients have the same needs and expectations. When designing a new plan or taking over an existing program, our consulting team will create a fact pattern based on the employer’s hiring activities, turnover experience, and demographic characteristics.  Company goals, resources, and employee classifications are only some of the factors to be considered in the process.  The result is a well-planned program that creates more employer and employee satisfaction.

Department of Labor regulations state that salary deferral contributions to a qualified retirement plan take the position that funds held in the general accounts of the Employer must become assets of the Trust as soon as administratively feasible, but no later than the 15th business day of the month following the month during which the funds were withheld from the employee’s wages.  While this is the statement provided by DOL, the intent of the law is that funds will be transferred within a timeframe similar to that established by IRS for the deposit of the employer’s Federal Tax withholding.  For example, if the tax deposits are typically made within three business days following the pay date, contributions to the 401(k) plan should follow a similar schedule.

Collecting and maintaining data for a qualified retirement plan is one of the requirements charged to the plan administrator of the program.  Accurate collection and maintenance of this data is increasingly important in light of the responsibilities and fiduciary duties applied by ERISA.  Without accurate data, plan violations can occur.  For example, employees may be paid benefits too soon or not soon enough where a date of birth is not accurately recorded.  Credited hours of service, employee class codes and details of termination and rehire dates must be maintained as part of the plan’s database.

A qualified retirement plan generally permits the payment of benefit options under various provisions of the plan document.  All plans are not required to include all available distributable events under plan, but must include provisions for normal retirement.  Additionally, a plan may offer participants an early retirement age and certain plans may provide for the payment of in-service distributions.

Although not a requirement of a qualified plan, many 401(k) profit-sharing plans offer their employees an option to withdraw the vested portion of their retirement plan benefits while actively employed by the employer.  These withdrawals may be in the form of a hardship withdrawal or a special set of circumstances defined in the plan document.

Selecting investments for a Company’s 401(k) plan is a major aspect for the decision makers responsible for designing the Plan.  The considerations regarding the investment model can be complex simply because of the many choices available in the marketplace today.  Participant or trustee direction, segregation or pooling of assets, and the comparative cost of these options are generally choices evaluated by plan sponsors.  This is where the advice of a competent investment professional is necessary.  Investment firms provide assistance with plan activities such as:

• Selection of a good investment mix for the participants
• Education materials for plan participants
• Enrollment meetings to explain the process of managing plan balances
• Assistance with plan distributions
• Rollovers from prior retirement plans
• Retirement planning for the executive staff

In selecting investment and fund management companies for a Plan, an employer has many choices:

MUTUAL FUNDS.  This is a popular choice among retirement plans since it offers the ability to invest in a number of stocks, bonds and other securities.  The assets are combined into one portfolio and managed by an investment company.   The fund then issues units or shares, giving each investor an interest in the portfolio.  The investor’s units represent a share of the ownership in the portfolio holdings.
In selecting mutual funds for a plan, the options should offer a diverse range of risk factors that include:

• A money market fund for conservative investors focused on preserving their existing investment
• A bond fund or other low risk fund as an additional conservative option
• A bond or equity fund that provides a medium-risk option
• An equity fund that provides a higher risk, but a potentially higher rate of return

SELF-DIRECTED BROKERAGE ACCOUNTS.   This options provides your employees access to an expanded list of stocks and bonds not offered as an option in the Plan.  Generally, additional fees are applied under this option because of the additional tracking of assets through an outside firm.  Self-directed brokerage accounts are used primarily by participants with large balances who prefer a broader selection of investment options.

ANNUITY CONTRACTS.   An insurance company can provide a variable annuity that includes several options such as a money market fund, a fixed-income option and a group of equity funds.  Under this type of contract, contributions are allocated among the different funds offered as part of the annuity. Fees in an annuity may be higher than in with a mutual fund arrangement and the services of an separate TPA may add to the cost.

IRS regulations permit employers to establish a 401(k) plan that is automatically deemed to pass the 401(k)/401(m) non-discrimination tests.  Two forms of safe-harbor plans are generally available:

• Non-Elective Safe Harbor.  Under this option, a contribution of 3% of compensation is made on behalf of eligible employees, whether or not the individual makes elective deferrals to the plan.

• Match Safe Harbor.  Contributions under this option are made to those participants who make elective deferrals to the plan.  A typical formula may be stated as 100% of the first 3% plus 50% of the next 2% of compensation deferred.  Other match formulas are permitted with certain restrictions.

Regulations provide that employers can add a provision to their 401(k) and 403(b) plans without a written election from the employee.  Under the auto-enroll feature, an individual is deemed to have made an election to participate unless the employee specifically elects otherwise in writing.  The participant must be offered the opportunity to decline participation and employers are required to issue initial and annual notices describing the process for revoking participation. 

Most employers find their financial professional through referrals from an existing relationship, experience with another employer or through word-of-mouth information from friends or professional organizations. Although this is a comfortable method for many individuals, a structured selection process is generally more acceptable.  It is recommended that each company establish a list of considerations for the selection process and begin with a list of firms that meet the criteria.

Investment professionals are compensated through various methods:

Financial Advisors.  An advisor is generally compensated on a fee basis rather than by brokerage commissions. Selecting a fee-only advisor eliminates any conflict of interest with respect to the selection of investment options and the movement of monies from one fund to another.  The financial advisor may select funds that pay no commissions and the advisory fee may exceed the cost of the commissions.  Although fees should be a consideration, the cost should be compared to the relative benefit and the decision based on the value to be added to the Plan. 

Brokers.  Your broker may be compensated by the investments placed in the plan, which may be comparable to the fee of a financial advisor.  A competent broker will generally disclose all commissions paid for the services provided and by using funds designed for a retirement plan, there is no incentive for the broker to move money from fund to fund.  As with the financial advisor, the broker should be considered for the value the firm can bring to the plan and not solely on cost.

Banks.  Many banks have brokerage units or investment management subsidiaries that often provide managed funds for plan participants.  Again, if the bank offers its own selection of mutual funds, the plan sponsor should request written details of the internal costs and the historical rate of return on the funds.  Also, be certain to ask how much of the account is required to be invested in proprietary funds.

Insurance Companies.  Variable annuities offered by insurance companies offer products that typically have a higher cost; however, these options can serve a purpose.  If the plan is a start-up, options may be limited and the insurance company may be willing to assist with the plan.  Also, if the plan is very large, the company may have a product to accommodate a negotiated fee.  Again, many insurance companies offer excellent web sites and enrollment materials to assist in the establishment of the plan.

Retention of accurate employee data is essential to the maintenance of a qualified retirement plan.  Records documenting dates of birth, hours of service, dates of employment and termination as well as employment status is essential in determining who is eligible to participate, who is entitled to receive a contribution and when distribution of benefits can be made to a participant.  Failure to apply accurate information to the plan’s administrative process could result in a violation of the plan’s written procedures or discriminatory operation of the plan. 

Employers should maintain (at a minimum) the following information for all employees:

• Social Security Number.
• Full Name
• Physical Address
• Date of Birth, Date of Employment and Date of Termination
• Status change dates
• Hours of Credited Service
• Salary History
• Other data required to ensure accurate administration of the plan

Procedures for capturing and maintaining this information should be adopted as part of the employer’s general human resource procedures.

Generally documents relating to a plan should be kept for a period of six years after the date of the Form 5500 to which they relate. It is recommended, however, that certain records be kept
for the life of the plan, or the existence of the plan sponsor.  In certain cases, the employer may be required to produce records long after a plan has been terminated and assets distributed.

A retirement plan that covers 100 or more participants is generally classified as a “large plan” and is required to file a Schedule H as part of the Form 5500.  A large plan filer must also include with the filing, an audit of the plan’s financial statements conducted by an independent accountant.  The reports must be filed annually with the Employee Benefits Security Administration (EBSA), a subsidiary of the Department of Labor, unless an exemption applies to the Plan. 

A plan audit must be conducted by a “qualified, independent” CPA firm that is required to follow DOL rules for the process.   If a service provider such as the recordkeeper maintains a SAS70, the plan auditor may be allowed to rely on the report and conduct a limited-scope audit for the Department of Labor filing.    

Title I of ERISA requires various types of disclosure to plan participants in various forms. 
Examples these requirements include:

• Summary Plan Description (SPD).  The SPD is a written form that can be easily understood by participants in the Plan, must disclose what the plan provides and how it operates. It includes information such as when an employee becomes a participant in the plan, how eligibility and benefits are calculated, how vesting is determined, how benefits are paid, and how participants can file a claim for benefits. If a change is made to the Plan, participants must be advised by the Plan Sponsor.  A synopsis of the changes may be disclosed through a Summary of Material Modifications or an updated SPD.
• Summary Annual Report (SAR). The SAR is a snapshot of the information reported on the plan’s annual Form 5500 filed with EBSA. The SAR includes information such as income received and expenses incurred by the plan, the earnings from investments, the number of participants in the plan and the value of benefits paid to participants. The SAR must be furnished to plan participants no later of nine months after the close of the plan year; or (if later) two months after the due date (with extension) of the Form 5500.

• Explanation of Benefit Options.  The employer must provide the participant or beneficiary receiving a plan distribution an explanation of the payment options available under the plan and related regulations.  This form, generally referred to as a 402(f) Notice includes information for the participant that includes rollover options, tax withholding rules and a description of the joint and survivor provisions.

• Safe-Harbor Notices.  Plans designed as a safe-harbor 401(K) are required to provide participants an annual notice not more than 60 days nor less than 30 days before the end of the plan year.  The notice must explain the safe-harbor provisions and the amount of the safe-harbor contribution.

These are but a sample of the disclosure requirements required by an ERISA Plan.  Other plan activities including changes in certain benefits and contributions, receipt of a Domestic Relations Order and termination of the program require similar notices to participants.  Additional information is available through the Department of Labor web site.

The Pension Protection Act of 2006 PPA now requires plan sponsors to provide benefit statements to all plan participants. Beginning in March, 2007, a pension benefit statement must be:

• provided quarterly to participants and beneficiaries who have the right to direct investments; or
• provided annually for participants and beneficiaries who do not have the right to direct investments;
• written so it can be understood by an average plan participant; and
• must include an explanation of permitted disparity or a floor-offset arrangements (if provided by the plan) and be delivered in written, electronic, or other form that is reasonably accessible to the participant.

This provision is generally effective for plan years beginning in 2007.

Qualified plans are required to meet certain non-discrimination rules to maintain the tax-exempt status of the program.  For example, a qualified plan generally cannot be designed to provide a benefit for highly-compensated employees, while excluding the nonhighly-compensated group. IRS requires that employers perform certain tests plans to ensure that no discrimination exists.

Required Testing Includes:

• Coverage Requirements.  IRC §410(b) requires that a certain number of non-highly compensated employees are covered by a plan or that the benefits provided to the highly compensated group is not significantly greater than those provided to the non-highly compensated employee group.

• Top-Heavy Testing.  IRC §416 requires that any Top Heavy plan is required to provide minimum benefits to all eligible participants.  A plan is considered top heavy if, on the determination date, more than 60% of the plan assets belong to key employees, as defined under the regulations.

• 401(k) Non-Discrimination Testing (ADP Test).  IRC §401(k) requires that on average, the group of highly-compensated employees (HCEs) cannot defer a significantly greater percentage of compensation to the plan than the group of non-highly compensated employees (NHCEs).  The test requires the average of the deferral percentages for the highly compensated group be compared to the average of non-highly compensated employees.  To pass the ADP test, the HCE Group average (the ADP of the HCEs) must not exceed the greater of:
• 1.25 times the ADP for NHCEs; or
• the lesser of:
•   two times the ADP for NHCEs; or
•   the ADP for NHCEs plus two percent.

• General Non-Discrimination Testing.   IRC §401(a)(4) requires that the benefits provided to the highly-compensated employees may not exceed the benefits provided to the non-highly compensated employees by certain ratios. 

ERISA defines a fiduciary as any person who is responsible for any of the following plan activities or functions:

• Exercises discretionary authority or control over the plan’s
  management or the disposition of its assets;

• Provides investment advice with respect to plan funds or property for a
  fee or other compensation or has any authority or responsibility to
  render such advice; or

• Has any discretionary authority or responsibility in the administration of
  the plan.

The trustee is designated in the plan or trust document.  The trustee is the person or entity that holds legal title to the plan’s assets and is responsible for their investment and safekeeping.  The Trustee may be an individual, a group or an institution such as a bank or other financial organization. 

The duties of the Plan Trustee are outlined in the trust portion of the document or in a trust agreement that is separate from the plan document.  The trustee is a fiduciary under the plan and is generally responsible for decisions associated with the oversight and investment of the plan’s assets.  This position is also responsible for developing and maintaining an investment policy for the Plan.  If participants are allowed to direct the investment of their account balances, the trustee is responsible for selecting the funds and for monitoring, adding and removing investment options based on performance and market conditions.  Ensuring the proper mix of investment choices is also a duty of the trustee.

For Example.  A qualified plan should offer a selection of funds that permits plan participants the opportunity to build a well-diversified portfolio suitable for their risk tolerance.  This would include a cross-section of retirement-plan quality funds that could create aggressive, balanced or conservative portfolios. 

The plan administrator is a fiduciary under the plan and is responsible for the tasks required to maintain the plan on a day-to-day basis.  These duties include:

• Maintaining employment records and census information
• Determining the eligible employees under the plan
• Maintaining the records used to calculate vesting
• Determining who is eligible to receive a distribution of benefits and the amount to be paid
• Issuing proper notifications to plan participants

FAQs:

What is ERISA?

ERISA stands for the Employee Retirement Income Security Act of 1974. It is the act that protects the rights of employees. ERISA is generally enforced by the Department of Labor.

Who is the plan trustee?

The plan trustee is responsible for holding and managing the assets of the plan. The trustee can be an individual or an institution, such as a bank or trust company. The trustee generally is responsible for receiving monies due to the plan, paying the fees charged to the plan, and purchasing and selling plan assets. The trustee can operate under the direction of an investment manager or participants of the plan who have been given authority over their plan accounts.

Who is the plan administrator?

The plan administrator is responsible for many of the plan’s operational and management functions. This individual or entity determines who is eligible to participate in the plan and what benefits should be paid to participants. The disbursement process, including distribution of required IRS notices, evaluation of domestic relations orders, and providing participant communication is the responsibility of the plan administrator.

Does every plan have a fiduciary?

Yes. Every plan must have at least one fiduciary named in the plan document.  It may be a person or an entity, including the employer, the board of directors or one individual employed or engaged by the employer.  The named fiduciary must be disclosed to plan participants.

Is the employer a fiduciary under the Plan?

Yes.  The employer has the option to amend the plan, determine the contribution amount, select investment advisors, and make other decisions that impact plan participants.  Because of the ability to exercise this level of control over the plan, the employer becomes a fiduciary.

How are investments selected under the Plan?

The employer generally selects a firm or individual with the expertise to recommend appropriate investment options for a retirement plan.  The Employer will also need to decide if participant direction of investments will be permitted or whether the assets will be managed by an individual or a firm employed by the plan.  An investment policy must also be established to provide guidelines for selecting individual investments for the plan.    Once these policy decisions are made, the advisor will select options under the plan based on criteria established by the employer in the investment policy.

Is the fiduciary liable for the selection of funds?

Perhaps.  However, if the fiduciary has carefully selected a group of funds and follows procedures for monitoring the investment options, the fiduciary may not be liable for normal market-value adjustments.  The issue is whether or not the fiduciary acted in a prudent manner, which is one of the central responsibilities under ERISA. If the fiduciary has the expertise required to make the investment selections and can demonstrate that decisions were made carefully, losses due to market fluctuation are unlikely.

As part of its fiduciary duties, an employer should establish a formal review process at reasonable intervals to determine if the current investment provider is operating the plan in the most effective manner.  Although a new provider may not be necessary, the plan fiduciary has demonstrated the use of best practices on behalf of plan participants.

What should a company consider when selecting a service provider for a plan?

When monitoring providers, employers should review the services offered and develop a comparison of options.  Criteria may include:

• A review of the provider’s performance as compared to the industry and other providers;
• Full disclosure of fees that will be applied to the plan and the investments
• Any complaints that may have been filed against the provider
• Longevity of the organization

In support of the automatic enrollment initiatives available in salary deferral plans, the Pension Protection Act of 2006 (PPA) conceived the Qualified Default Investment Alternative (QDIA) to aid plan sponsors with the fiduciary liability associated with “default” investments.

These regulations were derived from ERISA Section 404(c)(5) that was added to the PPA, and charges the Secretary of Labor to issue “guidance on the appropriateness of designating default investments that include a mix of asset classes consistent with capital preservation or long-term capital appreciation, or a blend of both”. 

The intent was to provide an investment liability safe harbor for plan fiduciaries in the absence of participant direction, as would be the case in automatic enrollment situations.  The proposed regulations, however, left some unanswered questions in the minds of those it was designed to protect.  Final regulations providing some clarity were published by the Department on Labor on October 24, 2007.  The rules were effective 60 days after the date of publication,

The QDIA rules are optional with certain arrangements and are required to be used with others. 

Qualified Default Investment Alternatives

Three main categories will qualify as QDIAs:

• “Life-cycle” or “targeted-retirement-date” investment fund products that invest in a blended portfolio of age and projected retirement-appropriate investments.

• A “balanced” investment fund product that considers the employee population as a whole versus individuals.

• A professionally investment-managed approach that spreads contributions among the plan’s existing investment selections.

A short-term option is available to assist employers in complying with the transfer and fee restrictions that exist for the first 90 days of the automatic enrollment process:

• “Capital preservation” products (money market funds) can be maintained for a period of 120 days from the date of the participant’s initial contribution, after which the fiduciary must direct the funds to one of the available choices.  This deadline is designed to preserve the principal of a short-term participant.

Stable value products have long been the investment default of choice for many employers, but were omitted from the QDIA options.  The DOL believes these investments (as well as the capital-preservation products) may be construed by participants and their beneficiaries as being too government-biased and would not produce growth-oriented returns as those provided by the alternate selections.  Monies currently invested in stable value funds, however, are grandfathered under the final rules.

The DOL also clarified that variable annuity, common collective trust fund and pooled investment fund portfolios can be a vehicle for approved QDIAs. 

As a practical matter, it will be fairly obvious which investments qualify as a QDIA.  However, it is good policy for plan sponsors, with the help of their professional advisors, to carefully evaluate the options.

Fiduciary Liability Relief

The statute requires compliance with each of the following conditions in order for the plan fiduciary to obtain reliance on the safe harbor:

• Assets must be invested in a QDIA prescribed by law.

• Participants and beneficiaries must have the opportunity to direct their investments, and failed to make an affirmative election of an investment option.

• Specific notice must be provided at least 30 days prior to the initial default into a QDIA and then 30 days prior to each plan year thereafter that a participant fails to make an election.

• All investment materials, (prospectuses, proxies, account statements) that are distributed by the QDIA investments must be made available to the participant and beneficiary directly from the provider.

• Participants and beneficiaries must be able to transfer freely out of the QDIA as the plan permits, but not less frequently than quarterly.

• Transfers or withdrawals of assets during the first 90 days in a QDIA are generally subject to applicable fees and expenses, according to the DOL, as long as those expenses do not represent a penalty expressly connected with the QDIA .

• Plans must meet the ERISA Section 404(c) requirement to offer a “broad range of investment alternatives” that include three diverse investments, whether or not the plan is intended to be a “404(c) plan”.

Additional Considerations

ERISA supersedes any state law that would directly or indirectly prohibit or restrict automatic contribution arrangements in any pension plan.

A QDIA is not permitted to invest in employer securities, except in very specific cases.

A qualified plan can define the group of eligible employees in many ways.  Although IRS regulations prohibit limitations that result in a “discriminatory” plan, the employer may be able to include provisions that limit participation to certain groups of employees, employees who work in a specific geographical location or employees who meet specific plan guidelines. 

Plan Requirements

A qualified plan must provide specific requirements for plan participation.  This includes any minimum age and service an employee must attain to enter the plan.  While these provisions are quite common in a plan, regulations limit their application to certain standards. 

Minimum Service and Service

A qualified plan may include a provision that requires that an employee satisfy specific requirements to become a participant in the Plan.  For example, an employee may be required to complete a year of service to become eligible for the plan.  An age requirement may also be includes as an eligibility provision.  For example, an employee may be required to be 21 years old before becoming eligible for the plan.  These features can be included separately or together as requirements for plan participation. 

Other Eligibility Requirements

Today, many employers offer their employees the opportunity to participate in a 401(k) or 403(b) retirement plan.  These programs allow participants to defer a portion of their wages before certain income taxes are applied to the paycheck.  Contributions are applied to the plan and earnings are applied to the participant’s account on a tax deferred basis. 

To become a participant in the Plan, the employee must complete a Salary Deferral Agreement, making an election to defer a percentage or a fixed amount to the plan.  The election is applied to the payroll program and funds are withheld each time a paycheck is issued.

Contributions to a 401(k) plan can be made in various forms.  Both employee and employer accounts can be funded with different money types based on the design of the employers plans.

Contributions from Plan Participants include:

• Traditional Salary Deferrals.  While this source is considered an employer contribution for tax purposes, the monies are derived from wages not paid to employees.  Employees are permitted to defer receipt of current compensation in lieu of contributions made on behalf of the participant to the employer’s plan.  Contributions are withheld on a pre-tax basis and are taxed to the participant when distributed from the Plan.

• Roth Salary Deferrals.  These contributions are withheld from the employee’s wages, but taxes are applied before the funds are contributed to the plan.  These contributions are held separately in the plan and if all Roth requirements are met, funds are distributed to the participant on a tax-free basis. 

Contributions from Employers include:

• Employer Non-Elective Contributions.  Employers may elect to make plan contributions to the plan generally based on salary and service.  The contributions may be made on a discretionary basis and be allocated with the plan according to a formula defined in the document.  These funds may or may be subject to a vesting schedule.

• Employer Matching Contributions.  Matching contributions are applied to the plan based on the deferrals made by employees.  The match may be in various forms and can vary from year to year.  Employees who elect not to make salary deferrals to the plan are not eligible to receive a matching contribution. These funds may or may not be subject to a vesting schedule.

A qualified retirement plan is considered an eligible retirement plan for rollover purposes and therefore is permitted to accept rollovers from various types of retirement programs.  However, a specific plan cannot accept a rollover unless the plan document includes a provision to accept an eligible rollover contribution.  The document can also define the rollovers it will accept.  For example, a plan qualified under IRC Section 401(a) may include a provision to accept rollovers only from other qualified plans.  The plan may also be designed to accept rollovers from 403(b) or governmental 457 plan and may include only pre-tax or after-tax payments.

With the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), 401(k) and 403(b) plan sponsors are can elect to permit employees to make traditional or Roth salary deferrals to their plan.   Generally, traditional deferrals to these plans are made on a tax-deferred basis with income and contributions taxed at the time the plan assets are distributed to the employee or beneficiary. 

Under a Roth option, participants are allowed to defer the same amount as in a traditional 401(k) or 403(b), but the Roth deferrals are withheld after taxes have been applied to the contribution amount.  Deferrals can also be split
The combined deferral limit for traditional and Roth contributions is the same as the limit for traditional 401(k) or 403(b) deferrals.  For 2008, employees able to defer up to $15,500 for tax if a participant is under 50, with additional $5,000 available to individuals who are over age 50.
Although the deferrals to a Roth 401(k) or 403(b) are made with after-tax dollars, the  earnings on Roth contributions will be tax free, if distribution is made at least 5 years after the first Roth contribution and the attainment of age 59 and one half.  Certain exceptions apply.

Although participant loans are not offered by all plans, many sponsors include the option as a method for employees to save and use those savings to make purchases or pay expenses.  Participants electing to take a plan loan are required to pay interest on the principal amount and make scheduled payments to the plan based on the plan’s loan policy.

If loans are allowed from the plan participants may generally borrow 50% of the participant’s vested account balance, but not more than $50,000.  The participant must pay a rate on interest on the loan that is comparable to a similar loans issued by financial institutions in the participant’s geographical region.  Loans must be repaid within 5 years unless the purpose of the loan was to purchase a primary residence.  

When taking a loan, participants should read and understand the plan’s loan policy.  Some plans require that payments must be made through payroll deduction and termination of employment results in a loan that becomes due and payable.  Where this is the case, a loan could result in an unexpected taxable event.  While the employee can generally rollover a similar amount to an IRA or other qualified plan, the employee must have access to sufficient cash to make the rollover contribution. 

A plan sponsor may also elect to permit employees who experience a financial hardship to take a distribution from the Plan.  The employer may permit hardship payments from employee deferrals only or include matching and non elective balances as well. 

IRS regulations permit the payment of employee contributions only from the deferral account, i.e., no earnings on deferrals may be paid for hardship.  If permitted, all balances from the match or non-elective accounts can be eligible for a hardship distribution. 

Regulations permit financial hardship distributions for:

• Purchase of a primary residence
• Post-secondary educational expenses for the participant or a dependent of the participant
• Payment of unreimbursed medical expenses
• Expenses resulting from a natural disaster
• Funeral expenses for the participants or a dependent of the participant

Before a hardship distribution can be made, the participant must receive any available funds available to the participant.  This includes any loan that can be received form any plan of the employer unless the loan would create an additional hardship on the participant.  Hardship distributions are subject to ordinary income taxes and if the participant is under age 59 ½, an additional 10% penalty may be due.

When a and how you can receive a distribution from your plan is dependent on the type of plan and the provisions the employer has included in the document.  Because a pension plan is required to provide a definitely determinable benefit, hardship payments are not permitted.  A profit-sharing plan, however, can provide distributions for employees who qualify for a hardship or meet certain criteria for in-service distributions. 

Benefits may also be paid when a participant is deceased or disabled and when the participant has attained normal retirement age under the plan.