Loans - Hardship Only

[MGOAdmin]

I have a client that allows loans for harships only. One of their employees (an NHCE) is in some financial trouble, but not for any of the hardship reasons (primary residence, medical, funeral etc.) The client would like to help out this employee but does not want to open the floodgates to the other employees, so I have a few questions:

1. What kind of evidence for the hardship is required by IRS/DOL (not by the plan)? Can we take the employee on their word only?

2. Can we amend the plan to allow for loans specifically naming this employee?

3. Can we amend the plan to allow for non-hardship loans for a specific period, say 5/1-5/31?

4. The loan is for a car - can we amend the plan to only allow loans for harship and transportation to and from work?

The bottom line is the client wants to help put their employee, but not does want all the other employees to start taking loans for "non-hardship" reasons.

Let me know what you think.

Thanks

[BG5150]

Why can't the ER loan him the money?

[MGOAdmin]

They have thought about it, but as a last resort.

[QDROphile]

1. Not relevant. The IRS/DOL do not have hardship requirements for loans. The sponsor made up the requirement, so it can make up the substantiation requirements.

2. The IRS does not like that approach to allocations. Probably fails the "reasonably equivalent basis" requirement, which is not expressly concerned with HCEs.

3. Someone will look like an ass when the disclsure comes out. Might fail the "reasonably equivalent basis" requirement.

4. Probably.

[masteff]

In addition to what QDROphile said above, I'd like to ask what specifically the plan says.

Does it say "loan for hardship reasons" or does it says "loan for this specific list of hardship reasons"? Be careful to not assume that a list of hardship reasons in one part of the plan should automatically apply to another part if the plan.

If you still feel the plan specifically limits the list of reasons, you could add a "facts and circumstances to be reviewed by the plan sponsor" reason for the purpose of loans. This opens it slightly to other employees but is far from a floodgate.

[BG5150]

^ but it puts pressure on the ER to determine what a hardship is for everyone.