How much may be taken as a hardship distribution?
Rev. 07/20/06, E-mail Alert 2006-14

The final 401(k) regulations contain the limit on maximum distributable amount for a hardship in section 1.401(k)-1(d)(3)(ii) .

General rule. The maximum distributable hardship amount is the employee’s total elective contributions as of the date of distribution, reduced by the amount of previous distributions of elective contributions.

Example. A participant has $10,000 in elective deferrals and takes a hardship of $1,000 on March 26, 2005. This reduces the amount of deferrals available for the next hardship to $9,000. If the participant needed another hardship on May 4, 2006 and had never made additional elective deferrals, the maximum elective deferral amount that could be withdrawn as a hardship is $9,000.

Note that the maximum distributable amount does not include earnings on Elective Deferrals, QNECs or QMACs (unless such amounts are grandfathered under the next paragraph) or Safe Harbor Contributions and the corresponding earnings.

Grandfathered amounts. If the plan so provides, the maximum distributable amount may be increased for amounts credited to the employee’s account as of a date specified in the plan that is no later than December 31, 1988, or if later, the end of the last plan year ending before July 1, 1989 (or in the case of a collectively bargained plan, the earlier of—

1. The later of January 1, 1989, or the date on which the last of the collective bargaining agreements in effect on March 1, 1986, terminates (determined without regard to any extension thereof after February 28, 1986); or
   
2. January 1, 1991, and consisting of income allocable to elective contributions; Qualified nonelective contributions and allocable income; and Qualified matching contributions and allocable income.
   

Note: Few plans maintained these additional balances back in 1988 due to the costs associated with deriving those balances. It should be remembered that the majority of plans at that time were balance forward or traditional recordkeeping and not daily valued.

Plan design options. It is important to remember that a plan may be written to permit sources other than those disallowed above to be available for a hardship withdrawal. Plans under the McKay Hochman Prototype are often written to allow these other sources.