Sources of Funds for a Church Plan Hardship Withdrawal

Q. Which sources of funds are available for a hardship withdrawal from a church plan? There are suggestions that under the Bipartisan Budget Act such withdrawals can be made from employee deferrals, QNECs and QMACs, but can they also be made from regular discretionary employer contributions and discretionary matching?

A. Between the BBA, the final changes to the 401(k) regulations concerning hardship withdrawals and the pre-approved document language, the rules for hardship and the sources will depend on: 

• what the investments are in the 403(b) (annuities or mutual funds or in a church plan it can be something else); 
• whether they are using a pre-approved 403(b) plan or a custom without IRS approval; and 
• the technical corrections for this (which have not been completed yet).

Part of the problem is that Internal Revenue Code Section 403(b)(11) requires that no income on deferrals can be distributed for a hardship. This would require a change to the actual statute, which has not been done.

So for 403(b)s, regardless of the investments, no income for elective deferrals may be paid on hardship.

For QMACs and QNECs (and safe harbor, but you probably will not see them in a church plan) and earnings thereon, these may only be distributed for a hardship if the investments are in annuities, not from mutual funds.

For the other contributions, you need to check the plan document. Under a pre-approved plan the safe harbor hardship rule are required to be used and will probably not permit hardship from other sources (IRS program rule). If the plan permits, then this would be outside of the safe harbor and the employer’s policy would need to include the criteria for the hardship which can be outside of the safe harbor.