Can an employer make exceptions to 401k plan rules for an individual employee?
401k plans are administered under a set of published plan rules. Often these rules lead to harsh results and employees want the plan administrator to make an exception. Can the administrator change the rules on the fly?
IntroductionGenerally no. ERISA requires 401k plans to strictly follow plan rules and treat employees fairly. The intended effect is for the plan to treat employees equally. To violate plan rules can result in as little as fines or as much as forfeiting the entire plan. Changing distribution rules requires amending the plan for all participants and amendments often cannot go into effect immediately. Even with plan amendments ERISA rules do not permit a wide range of discretionary withdrawal options.
401k plan hardship withdrawals in Dallas and Fort Worth, TexasAs far as your employee, you may want to see if that employee has any options currently available. Many plans offer hardship withdrawals. The plan may be set up for only safe harbor hardship withdrawals that allow hardship distributions for limited hardship situations. Your plan may instead offer a "facts and circumstances" hardship withdrawal that allows the plan administration to define additional categories. Depending on what the plan allows it may offer a hardship withdrawal for the reason the employee needs to access funds. Unfortunately, there may not be a 401k option available.
It is important for plan administrators and management to establish the right benefits culture at work. Employees should learn their plan rules and investment options. Often employees perceive it as accessible at any time. Not as retirement assets they will need when no longer able to work. A strong message about the importance of retirement savings can limit the requests for distributions - a major plan expense - and encourage employees to save for the future.
Other distribution optionsSome plans are set up with liberal in-service distribution options to encourage employees to make contributions so that management can make their own contributions without making the plan top heavy and fail discrimination testing. While I appreciate the logic behind that decision I disagree that it is the best approach for the employees and the plan sponsor. Developing a strong benefits culture that emphasizes the importance of retirement savings can overcome the need for liberal in-service distribution rules in many cases.