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Hardship - can you use the same invoice again?


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I've got a participant who took a hardship distribution from the plan to pay medical expenses (using the safe harbor hardship rules).  We now find out three months later that the participant used the money for other purposes... so those invoices are still unpaid.  Now he is asking for a hardship using the same bills he provided before (or maybe they are updated versions, but it's the same amount for the same place).  Is there any reason the Plan Administrator can deny the request under the regulations?  He has enough of a basis to take the amount again.  Thanks!

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I don't work with things like hardship withdrawals and I don't know the rules, but it seems to me that the regulations MUST allow (if not require!) you to refuse to give a hardship withdrawal for specific medical expenses for which a hardship withdrawal has already been given.  That the participant failed to use those funds for the purpose for which they were paid is the participant's problem, and should not be yours.

Always check with your actuary first!

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14 minutes ago, BG5150 said:

Where does it say the participant must use the proceeds to offset the need?

Probably nowhere.  Just don't come a-knockin' later looking for another hardship withdrawal to pay the same bill.  That's the way I think it ought to be.  Where does it say that once a hardship withdrawal is made to cover a qualifying expense but it is not used to make that payment, then they can take another hardship withdrawal?  401(k) plans aren't Christmas Clubs, after all.

Always check with your actuary first!

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I just don't see this covered in the regs (not that I expected to).  The way I read it, each hardship application is a discrete event - today, at the time of this application, does the participant have a valid, substantiated reason to take a hardship and the available amount to do so?  Based on this, the answer is "yes".  But it just seems so wrong... what's to stop someone from pulling this scam over and over until they deplete their entire hardship basis (which is usually a good portion of their account)?  Maybe the inability to defer for six months at a time might be a deterrent, but not to everyone.

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35 minutes ago, BG5150 said:

Where does it say the participant must use the proceeds to offset the need?

It doesn't.  But depending on timing, the participant must use "all available resources" to satisfy the need.  If they want to claim the need hasn't been satisfied for purposes of getting the second hardship, the plan sponsor would also have to determine the disposition of the first hardship distribution (i.e. verify it was spent).

I think the second hardship can be given - IF the plan sponsor verifies the first hardship distribution is no longer available to satisfy the need - BUT I can't imagine any plan sponsor wanting to get that involved.  I would suggest tightening up the hardship policy to not allow such nonsense.

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35 minutes ago, TPAJake said:

If you grant a hardship for $2k of medical bills, then grant another one 6 months later for the same $2k on the same medical bills, you have distributed $4k for a $2k need.  Am I crazy?  Maybe don't answer that...

That is certain one way to look at it, and possibly the best way to look at it.  But, the question can also be answered by looking at the two (or more) requests as discrete events.  As indicated above, I wouldn't advocate that because of various logistics, but if the bill is still outstanding at a later date, a hardship condition would exist.

It may be easier to consider the eviction hardship.  In January, the participant asks for a $1000 - representing two month's rent to bring his rent current.  He/she gets it, and blows it.  Evictions take time so the participant is still there a month later, now owing $1500.  Wold you give the participant only $500 more, or in order to prevent eviction, would the need be $1500?

 

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I think there are two other threads talking about the fact that hardships can't be reversed if the need evaporates after the hardship is paid.  Does that bear on the issue here?

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Too bad the hardship rules don't call for the payment to go directly from the plan to the party owed the money necessitating the hardship withdrawal (but that would violate the no assignment/alienation rules, wouldn't it?).

I don't want to be casting aspersions, but what are these people thinking, spending the money on something other than preventing eviction? 

Outside possibility that might make things look better:  Suppose the hardship was requested for reason #1 but expenses arose that would qualify for hardship under reason #2.  For example, the money was taken out to prevent eviction but is needed even more desperately for emergency medical treatment.  In such a circumstance, it would seem to be acceptable to allow a second hardship withdrawal.

Always check with your actuary first!

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If I were the Plan Administrator, I'd deny the request, absent unusual circumstances. To take an extreme example, just to illustrate the point: Suppose the second request is made 1 week later. Then a week after that a third request is made. Then a week after that, a 4th request is made. Do you keep allowing "hardship" withdrawals just because the "need" still exists, while the participant then jets off to Bermuda on vacation using all of the previous "hardship" withdrawals? I grant you that my example is absurd, but I'm just saying...

I would generally not want to be in the position of defending the second withdrawal for the same invoice, although things are not always black and white and I can imagine an unusual set of circumstances where it might be legit. You take a hardship to prevent eviction in 30 days, but next day your spouse dies, and you have to pay for funeral expenses right now, so you use the "eviction hardship distribution" to pay funeral expenses. You still face eviction. In a circumstance such as this, I'd approve a second withdrawal to pay the mortgage.

In the far more likely scenario where the employee just spent the money for a "non-hardship" purpose, then I'd deny the second request for the same invoice.

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1 hour ago, Belgarath said:

In the far more likely scenario where the employee just spent the money for a "non-hardship" purpose, then I'd deny the second request for the same invoice.

And you just made another fiduciary decision - and one requiring you to delve into the personal spending of your employee.  I "think" it would be appropriate (read "legal") to approve or deny such a secondary request, but my preference would be to limit hardship universally through the plan documents or a hardship policy to one per "occurrence" or one per certain time period.  That way, you eliminate any argument as to whether the money was spent "frivolously."

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This strikes me as one of those situations were you point to the provision that is in all plan documents that says the Plan Administrator has the authority to reasonably interpret and apply the plan's provisions in a non-discriminatory manner. 

Based on the debate it is clear there is no set guidance on the issue in plan language or law.  So decide what the plan's policy on this is going to be.  Document the reasons and thinking.  Document the policy as decided and be consistent. 

I for one if I was a Plan Administrator I would set the policy of one bite at the apple but I see the other sides point. 

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35 minutes ago, ESOP Guy said:

This strikes me as one of those situations were you point to the provision that is in all plan documents that says the Plan Administrator has the authority to reasonably interpret and apply the plan's provisions in a non-discriminatory manner. 

Based on the debate it is clear there is no set guidance on the issue in plan language or law.  So decide what the plan's policy on this is going to be.  Document the reasons and thinking.  Document the policy as decided and be consistent. 

I for one if I was a Plan Administrator I would set the policy of one bite at the apple but I see the other sides point. 

Sage advice - as I said above, it may be "legal" but not a good idea to allow it - and not allowing it needs to be pursuant to set policy and documentation.

By the way, it's discussions like this one - that point out something that most of us may not have experienced - that proves the value of this site and the community participating in it.

As a result of this thread, we are reviewing our standard "hardship" policy we offer to our clients, and are revising it accordingly.

Thanks all!

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All good points.  In the case of the money being instead spent on burial or to prevent an eviction, then the second hardship request would (in my office) be approved based on those bills, not using the original bills from the first request again.  The 2 discrete events would require their own evidence without an overlap.  

To the original question, for me it's about how the DOL or IRS would view it 3 years after the fact.  If I approve it using the same bills twice, I have to defend my position & the Plan's, while the Participant answers for nothing but taxes due.  If I do not approve that second request without fresh bills, the Participant is on the hook for their own misspent hardship proceeds--Not to sound callous, but you better have used the money for those medical bills, because Jake is not going to risk the relationship or the Plan to give you more money for the same thing twice.  

Medical bills are treated differently than evictions, as rent is recurring each month while un-reimbursed medical bills are generally a single event.  You can't give me the same eviction notice over & over again, but if the dates are different (and current), we would likely approve the second request unless the Plan Document or Hardship Policy forbids it.  I actually had a client years ago that was a property management company & a Participant was generating their own fraudulent eviction notices every few months.  We approved 3 or 4 hardships before we realized it was her own signature on the notice.  She was banking the safe harbor match, then pulling the deferrals out as a little bonus for herself--The Participant was fired & no harm came to the Plan, but thankfully we caught it before anyone else did.   

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21 minutes ago, TPAJake said:

 In the case of the money being instead spent on burial or to prevent an eviction, then the second hardship request would (in my office) be approved based on those bills, not using the original bills from the first request again

But there isn't a need to prevent eviction anymore because you already made the payment.  It kind of brings you full circle if you want to approve the second hardship since you are either 1) approving it based on the same bill twice , or 2) approving it for a bill that has already been paid which means there is no actual need anymore.

 

 

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We've previously been down the path of approving hardships for emergency medical expenses that were advanced via credit card (the IRS says you can't do it, but everybody does).

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We had a participant try that recently, but in a slightly different way.  He requested the maximum hardship amount and provided a stack of medical bills as documentation.  As we went through the bills, there were duplicate bills included in the stack.  The bills had different dates, but were for the same amounts and the same service dates.  We sorted through the bills, culled the duplicates and totaled up the amount actually owed and recommended to the sponsor that the hardship distribution amount not be allowed to exceed the total owed, grossed up for taxes.  That seemed a pretty obvious course of action given the circumstances.   I don't think you should have a different result just because the participant splits the duplicate bills into two separate hardship requests.  

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27 minutes ago, Mike Preston said:

We've previously been down the path of approving hardships for emergency medical expenses that were advanced via credit card (the IRS says you can't do it, but everybody does).

Informally (conference panels) the IRS has said you can do it.  I think it is a gray area, but like you said, everybody does it.

 

 

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  • 9 months later...
On ‎8‎/‎4‎/‎2017 at 2:05 PM, Mike Preston said:

We've previously been down the path of approving hardships for emergency medical expenses that were advanced via credit card (the IRS says you can't do it, but everybody does).

Mike Preston,

Do you happen to have a reference to support this statement?  I am trying to find something I can use to support an approval for a hardship distribution for a funeral expense already paid for by credit card.

Thank you!

 

It's nice to be important, but it's more important to be nice...

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