Hardship for home purchase, deal falls through

There's been some discussion on this topic over the years, and as far as I know, there's no concrete guidance from the IRS. Situation is where a participant legitimately requests hardship withdrawal, has all proper paperwork, etc., check is issued, cashed and deposited and deal falls through at closing. (And closing go sour quite often...)

Participant wants to know if funds can be deposited back into plan.

I've seen various solutions. QDROphile has sensibly suggested in the past that funds be delivered to escrow, then if closing falls through, redeposit to the plan. Seems defensible. My question on this is do you have problems with the investment provider and reporting, particularly due to withholding if it crosses calendar years?

Someone else (I think it was KevinC) suggested it could be corrected under EPCRS as an overpayment. While probably true, this should theoretically work only once, because part of SCP correction is changing procedures so it doesn't happen again.

You could just allow it to be re-deposited, under a "common sense" approach. Again, I'm not sure how different vendors/platforms might view or allow/disallow this.

You could take the approach that "too bad - it was a legitimate hardship when made, and you can't undo it." This actually seems like probably the most appropriate answer, although perhaps an unjustifiably harsh result for the participant.

All of this of course tempered by some of the incredibly asinine requirements by many mortgage LENDERS and what/how/when they require things to be done. It's conceivable that they might not allow the closing if the funds are in escrow? Seems ridiculous, but I've heard some strange scenarios.

Really just wondering if anyone has any other brilliant ideas/insights, or has heard of any pending guidance, discussion from the podium at conferences, etc... Thanks!!

I think the participant is out of luck.  A "hardship" existed at the point in time of it's request/payment.  The tax consequences affixed at the time of distribution (and that wold be true even if "distributed" to escrow).  I know of no way to "reverse" a hardship distribution.

Timing is everything - perhaps a word of caution - delay the distribution until everything is set to close, then pay to have the funds wired.

30 minutes ago, Belgarath said:

You could take the approach that "too bad - it was a legitimate hardship when made, and you can't undo it." This actually seems like probably the most appropriate answer, although perhaps an unjustifiably harsh result for the participant.

FWIW, this was the IRS answer to this question last year or the year before at ASPPA Annual.  Of course, this is only the panelist's opinion, but it makes sense.

I'll see if I can find the written answer (if any), or my notes on the answer.

Thanks!

36 minutes ago, Belgarath said:

Thanks!

2015 ASPPA Annual IRS Q&A

Q#18

Can a participant could return a hardship distribution to the plan if the reason for the hardship was no longer valid?  Example – I contract to buy a house, request a hardship distribution that is granted to me. After I get the money the house sale falls through.

ASPPA Proposed Answer

There is no mechanism for returning an unused hardship distribution to the plan. A deposit of those funds back to the plan would constitute an after-tax employee contribution. The fact
that the reason for the hardship was valid at the time it was made is sufficient for the hardship distribution to be permissible, so there is no qualification problem with the fact that the house purchase ultimately fell through. The participant should likely bank the proceeds of the distribution in anticipation of ultimately buying a different house.

IRS Panel Response

To be discussed from the podium

My Notes on IRS Answer From Podium

The hardship is permissible because it was valid at the time of distribution. There is no procedure to allow the return of a valid hardship distribution to the plan.  The money stays with the participant.

*Edited for formatting

Wondering whether, if everything happens quickly enough, the proceeds could be rolled over to an IRA?  Although, if I am not mistaken, that would prevent them from being used to buy another house without substantial tax consequences.  There are no hardship withdrawals from IRAs, right?

21 minutes ago, My 2 cents said:

Wondering whether, if everything happens quickly enough, the proceeds could be rolled over to an IRA?  Although, if I am not mistaken, that would prevent them from being used to buy another house without substantial tax consequences.  There are no hardship withdrawals from IRAs, right?

Hardship distributions are not rollover eligible though.  

§ 402(c)(4)

I'm pretty sure I wrote that ASPPA proposed answer to the question and we know that the IRS agreed.  The participant had a hardship distribution when the distribution was made and at the time of being made, it met all the criteria. The fact that the deal fell through doesn't change the circumstances of the distribution or the tax ramifications.  The rules are written to allow these distributions and a valid purchase/sale agreement is all that is necessary to justify it.  If the deal ultimately doesn't happen, well that is just life and there is no going back.

I have had that "you can't un-ring the bell" conversation way too many times with Participants.  Unfortunately it usually follows a conversation a few weeks prior where I told them to wait until they get closer to the closing date before making that withdrawal...

1 hour ago, TPAJake said:

I have had that "you can't un-ring the bell" conversation way too many times with Participants.  Unfortunately it usually follows a conversation a few weeks prior where I told them to wait until they get closer to the closing date before making that withdrawal...

Has anyone ever heard of an instance where saying "I told you so!" made things better?

11 minutes ago, My 2 cents said:

Has anyone ever heard of an instance where saying "I told you so!" made things better?

It's never made "things" better, but it certainly has made *me* feel better - temporarily!

Rarely. But once in a while, after someone has chewed your tail and basically told you don't know what you are talking about, because "they read an article" or "their (insert relative) works in the business and told them we don't know what we are talking about" there's a certain satisfaction to be able to point to the e-mail and mention that you DID advise them of this.

16 minutes ago, My 2 cents said:

Has anyone ever heard of an instance where saying "I told you so!" made things better?

Sure!  When you end up saying it often enough people stop jumping the gun because they just don't want to hear you say "I told you so!".  Or my personal favorite "I informed you thusly!" 

6 minutes ago, RatherBeGolfing said:

Sure!  When you end up saying it often enough people stop jumping the gun because they just don't want to hear you say "I told you so!".  Or my personal favorite "I informed you thusly!" 

That is one worthy of favorite status.  My all time personal favorite though, is:  I told you so, REPEATEDLY" - as you hand them a stack of printed emails....

relative to Belgarath's last post...I had a participant's wife call and even before I had the chance to tell her that I couldn't speak with her about her husband's account/plan she proceeded to tell me that there was no way her husband's plan did not allow for hardship withdrawals because her plan at work and her sister's plan at work allowed them!  She told me that I really needed to check again for her because it just absolutely was not the case.  Once she finally stopped talking I threw it out there that I couldn't talk to her but would be happy to talk to her husband about it.  (The plan did NOT allow hardship withdrawals.) She hung up on me and I never did hear from the husband......:)

3 hours ago, My 2 cents said:

Has anyone ever heard of an instance where saying "I told you so!" made things better?

No, which is why I don't say it like that.