Current Thinking

Hardship Cases Can Be Hard Work

Working with plan participants looking to make a withdrawal from their retirement plan to deal with a hardship can be challenging – especially for employers/plan sponsors.

One Pentegra advisor recalls how one of his clients – a fairly large one – prefers not to get involved with hardship cases … and for some understandable reasons. “Hardship” in such circumstances means a financial hardship, and can arise from a number of factors, including but not limited to:

  • Certain medical expenses faced by the participant, spouse and/or dependents
  • Home purchase
  • Repairs of damages to a principal residence
  • Avoiding eviction or foreclosure on a principal residence
  • Certain tuition and other educational fees for the participant, spouse and/or dependents
  • Funeral expenses for the participant’s deceased parent, spouse or dependents

Most plans utilize a regulatory “safe harbor” definition of an immediate and heavy financial need, which limits distributions to payments for the above circumstances, and do the same when determining the amount needed to satisfy those financial needs. As a result, the participant must first take all distributions and non-taxable loans available under all plans of the employer, and the participant’s contributions to all employer-deferred compensation plans must be suspended for six months.

When a plan does not use the safe harbor definitions, the plan administrator must determine the existence of the financial need and the amount needed to satisfy it. And this is why the aforementioned client – and many more – was reluctant to get heavily involved with essentially adjudicating hardship claims.

In addition to understanding what a given sponsor’s plan document says – not always a given, as we have demonstrated elsewhere – about hardships, the sponsor is required to gather a great deal of documentation to support the participant’s statements about their hardship situation.

Obviously it can be uncomfortable getting into an employee’s personal life: reviewing their finances – including receipts – as well as the situation at hand can be difficult even under “normal” circumstances, never mind at a particularly traumatic moment.

Even more difficult is telling the participant “no,” in cases where they have failed to meet the hardship requirements … especially if you personally agree with the desperation they feel they are facing.

Handing these duties off to a qualified third-party administrator like Pentegra, then, alleviates much of the emotion involved, and should remove any vestiges of “ill will” a participant may have for an employer they view as uncaring or unhelpful. Pentegra will take the time to explain where, if necessary, the participant’s request falls short, and work with them to find ways of making their request one that stands a better chance of acceptance by all involved.

About the Author

Richard Rausser

Richard W. Rausser has over 25 years of experience in the retirement benefits industry. He is Senior Vice President of Client Services at Pentegra Retirement Services, a leading provider of retirement plan, fiduciary outsourcing and institutional investment services to organizations nationwide. Rausser oversees the consulting, marketing and communications, non-qualified plan and BOLI business development and  actuarial service practice groups at Pentegra. He is a frequent speaker on retirement benefit topics; a Certified Pension Consultant (CPC); a Qualified Pension Administrator (QPA); a Qualified 401(k) Administrator (QKA); and a member of the American Society of Pension Professionals and Actuaries (ASPPA). He holds an M.B.A. in Finance from Fairleigh Dickinson University and a B.A. in Economics and Business Administration from Ursinus College.