The following information should help you navigate the new rules, effective January 1, 2009, that affect requests for disbursements, loans and withdrawals from your 403(b) plan(s).
Prior to the final regulations being released, participants could request distributions directly from their investment providers without plan sponsor involvement or approval. 403(b) programs must now have a written Plan Document which contains all material terms and conditions of the Plan, including eligibility, benefits, investment alternatives, and the time and form of distributions.
The final regulations state that as an employer-sponsored plan, all disbursements to participants under a school’s 403(b) plan must be centrally coordinated. The IRS will no longer allow plan participants to authorize their own distributions without review and approval by their plan administrator who must determine:
- when the employee’s circumstances qualify for taking a hardship withdrawal, distribution, or a loan;
- when a transfer is permitted under the terms of the 403(b) plan and IRS rules; and
- when a domestic relations order has sufficient information to enable benefits to be set aside for an alternate payee under a Qualified Domestic Relations Order (QDRO).
Each employer will either have a Plan Administrator or will be self-administering their plan. You must comply with your plan when requesting a disbursement, loan or withdrawal. Contact your 403(b) Plan Administrator or investment provider for direction...as they will have essential information regarding availability or requirements for taking disbursements, loans or withdrawals from your 403(b) account(s) and how to obtain and/or complete the paperwork to begin the process.
Your employer plan or the provider may restrict or prohibit loans or hardship withdrawals, or restrict when you can obtain funds from your account. Your employer’s plan document is the final word on whether or not a provision is available to you and when it is available, and then …the loan, withdrawal or disbursement must also comply with your providers rules.
DISBURSEMENTS – Any request for funds must be accompanied by the appropriate paperwork which starts with forms obtained from your Plan Administrator. Once completed with accompanying requirements, paperwork must be approved by the Plan Administrator prior to it being forwarded to the provider for disbursement of funds.
As there is now an additional step in the process the timeline for the receipt of the requested funds has expanded and many participants are experiencing delays. Participants should prepare themselves for delays by initiating their paperwork as early as possible once they become aware of the need of funds.
HARDSHIP WITHDRAWALS – Your employer’s Plan Document will stipulate on whether or not hardship withdrawals are allowed. When they are allowed, the new IRS rules no longer allow self-certification for a hardship withdrawal.
Under the new regulations approval of hardship withdrawals can be at the discretion of the Plan Administrator who reviews each request on its individual facts and circumstances.
Hardship withdrawals, when available, may be approved when the participant has no other resources available, including the possibility of taking a loan. You will also be prohibited from contributing to a 403(b) for the next six months.
Hardship withdrawals can be made for:
Withdrawals are subject to ordinary income taxation in the year withdrawn and are not exempt from an IRS 10% penalty. Consulting a tax professional before making a hardship withdrawal is highly recommended.
- Expenses for medical care that would be deductible from the participant's federal income taxes under Internal Revenue Code Section 213(d), determined without regard to whether the expenses exceed 7.5% of the participant's adjusted gross income.
- Costs directly related to the purchase of a principal residence for the participant excluding morgage payments.
- Payment of tuition, related educational fees, and room and board expenses for up to the next 12 months of post-secondary education for the participant, the participant's spouse, children, or dependent.
- Payments necessary to prevent the eviction from or foreclosure on a mortgage on the participant's principal residence.
- Payments for burial or funeral expenses for the participant's deceased parent, spouse, children or dependents (as defined in Section 152 of the Internal Revenue Code)
- Expenses for the repair of damage to the participant's principal residence that would qualify as a casualty deduction from the participant's federal income taxes under IRC Section 165, determined without regard to whether the loss exceeds 10% of adjusted gross income.
LOANS – When allowed, you can borrow up to $50,000, the IRS limit, (note: your providers limit may be less)*, or one half of your 403(b) account balance, whichever is less. The total of your loans from ALL 403(b) providers offered through your employer cannot exceed $50,000 and your employer may place a limit on the number of outstanding loans one may have. The limits are also reduced if you have had a loan outstanding against your account during the prior 12 months.
Your loan rate is available from your provider and any application fee is deducted from the loan principal.
You must repay your loan in equal monthly installments over no more that a five-year period. An exception is if the loan is used to purchase a principal residence. In this case the loan duration period can be up to 10 years; however, your employer may restrict this to a lesser amount of years. You can repay your loan balance at any time without incurring a penalty.
A loan is considered in default if a payment is not received within the loan agreements specified days of its due date. Upon default the outstanding balance will be treated as a taxable distribution and will be subject to taxes and possible penalty
Your plan may prohibit loans to any participant who has previously defaulted on a loan from any retirement or deferred compensation plan sponsored by the employer. Should the participant, or his/her beneficiary be entitled to a distribution of benefits under the terms of the plan, due to separation from service, attainment of age 59 ½, death, disability, or financial hardship as defined under the IRS Code, any distribution from the participant’s account may first be reduced by any outstanding indebtedness on the loan prior to any amounts being paid out.
*See IRS guidelines for additional loan information.
Please continue to contact your “Broker Dealer” or “Provider” for account balances or to change your allocations.