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Loans before Hardship Withdrawal


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Does the IRS require 401(k) participants to take a loan before they can take a hardship withdrawal or is this a plan-specific rule?

My client contact informed me that there SPD states that "The Plan Administrator may require that you take a Plan Loan instead where this is financially feasible." My client contact thinks that language is rather vague and not sure how financially feasible is determined. Please advise.

Also, if the participant does not have any money available for a loan or does not have enough to meet the minimum requirement for a loan issuance, can the client allow the participant to take a hardship withdrawal?

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yes, under the safe horror....er... harbor rules for hardship withdrawals if loans are available they are suppossed to be used first.

however, I've seen it argued, a person seeking such a loan could be considered a bad credit risk and therefore denied a loan since they won't be able to pay back the loan.

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yes, under the safe horror....er... harbor rules for hardship withdrawals if loans are available they are suppossed to be used first.

however, I've seen it argued, a person seeking such a loan could be considered a bad credit risk and therefore denied a loan since they won't be able to pay back the loan.

And the regs say the "Employee need not take counterproductive actions" before taking the hardship, as it may increase the need.

Unfortunately, the regs only give us the one example: a person doesn't have to take a loan first if the existence of that loan would preclude the issuance of a mortgage.

I see that as a bona fide reason. But that's the only example they give. They don't have an example of someone who needs $10,000 to pay for college. I don't see where a loan in that case would 1) increase the need or 2) be a counterproductive action. Yet, it seems in practice, a lot of people just "say" the loan would add to the need and just issue the hardship with no loan.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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I agree with the above posts, but will add that under the Resources test, even if the safe harbor rules aren't used, the general test requires available plan loans to be taken as part of the "no alternative means available" requirement.

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  • 5 years later...
On 4/30/2018 at 5:10 PM, jim241 said:

Does loan requirement mean a full loan must be taken or just a loan between the min/max allowable under the plan? 

The 2018 Bipartisan Budget Act eliminated the need to take a loan before a hardship withdrawal (you were responding to a 5+ year old thread).

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while Card's statement is true, technically this isn't effective until plan years beginning after 12/31/2018, so it might be pushing it....(e.g. at this time if someone takes a hardship you are still suppose to suspend deferrals for 6 months, not "well, they have eliminated that rule in the future so we can ignore it, despite what the document says")

 

for those that missed it, the following changes are upcoming for hardships

(and I assume most documents would have to be amended for these to apply)

 

SEC. 41113. Modification of rules governing hardship distributions.

6 months suspension of deferrals after taking a hardship is eliminated (the revised regulations under this section shall apply to plan years beginning after December 31, 2018).

 

SEC. 41114. Modification of rules relating to hardship withdrawals from cash or deferred arrangements.

Section 401(k) is amended by adding a new section 14

(14) SPECIAL RULES RELATING TO HARDSHIP WITHDRAWALS.—For purposes of paragraph (2)(B)(i)(IV)—

(A) AMOUNTS WHICH MAY BE WITHDRAWN.—The following amounts may be distributed upon hardship of the employee:

(i) Contributions to a profit-sharing or stock bonus plan to which section 402(e)(3) applies (that is, a 401k plan).

(ii) Qualified nonelective contributions (as defined in subsection (m)(4)(C)). QNECs can be taken

(iii) Qualified matching contributions described in paragraph (3)(D)(ii)(I). QMACs can be taken

(iv) Earnings on any contributions described in clause (i), (ii), or (iii). Earnings are now includable

(B) NO REQUIREMENT TO TAKE AVAILABLE LOAN –(no longer required a participant must take a loan first before a hardship)

These changes would also become effective for plan years after 12/31/2018.

 

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56 minutes ago, card said:

The 2018 Bipartisan Budget Act eliminated the need to take a loan before a hardship withdrawal (you were responding to a 5+ year old thread).

Correct - but for plan years beginning on or after January 1, 2019. 

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