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Hardship Distribution - Time limit for eligible expense?


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A plan is using the safe harbor rules for hardship distributions.

A participant incurred a medical expense in 2019 and has been paying the bill off over time.  There is currently an amount still owed on the original expense. 

Two questions:

1.  Assuming the document is silent on this specifically, can the participant request a hardship for the amount of the medical expense that is still outstanding even though the original expense occurred two years ago?

2.  If #1 is a "Yes", assuming the plan document allows for additional hardship restrictions, is it acceptable to say for example, that hardships will only be allowed for an expense that occurred no more than 6 months from the date of the request?

Thanks very much.

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As to #1 I don't think there is any time frame in the code. I believe it just says "Medical expenses (described in IRC §213) incurred by my spouse, dependents or me" of something similar. If the debt that's being paid off over time is medical in nature I don't see why that might not create a hardship down the road when the pariticpant may no longer be able to make the payments for one reason or another.

As to #2, the Plan can have reasonable administrative procedures to determine which hardships they will approve and which they won't including a reasonable time frame on when expenses were occurred as long as the procedures are consistent and non-descriminatory.

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I’d welcome BenefitsLink commenters’ thoughts about these questions:

If a plan limits a hardship to an expense incurred no earlier than the past six (or other number of) months, is such a limit a provision a summary plan description must describe?  If not, is it a restriction on a benefit that an SPD must describe?

How practical would it be to do this disclosure if the plan’s administrator uses a summary plan description computer-generated by the recordkeeper’s plan-documents software?

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18 minutes ago, Pam Shoup said:

My concern would be the "Immediate and Heavy Financial Need" part of the hardship test.  If the hardhsip occurred two years ago and the person has been making payments, I would not consider that a hardship.

But what if was a large bill that had say a 5 year payment plan. At the beginning of the payments he was not eligible for hardship because he has savings. Over the next two years he exhausts his savings paying off the first 2 years medical debt. Now he has no savings and is living paycheck to paycheck but still has the medical debt payments and no savings left to cover it.

Or is married, with the spouse's income they can make the payments but spouse loses job and they can no longer afford the medical debt payment.

Under both scenarios the participant now has an "Immediate and Heavy Financial Need"

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And if the plan administrator's or claims administrator's interpretation treats a previously incurred medical expense as no longer deemed immediate and heavy because the expense was incurred some months ago, is that something a summary plan description must or should describe?

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Yes, I believe the additional restriction would have to be included in the description of the hardship distribution terms.  In our document software there is an "Other" limitation section to limit describe further limitations.  That additional language would be captured in the SPD.  I would think any document that allowed for additional limitations would also add the additional language in the supporting ancillary documents, but I suppose it might not, which would be a consideration for adding or not adding as you indicate Peter.

Pam, so you are thinking that although circumstances may have changed for the participant making the further payment of the outstanding balance a hardship, the fact that the expense originated two years prior negates the hardship?

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24 minutes ago, Pam Shoup said:

My concern would be the "Immediate and Heavy Financial Need" part of the hardship test.  If the hardhsip occurred two years ago and the person has been making payments, I would not consider that a hardship.

The hardship wasn't two years ago, it is still ongoing.  Under safe harbor rules, its expenses for or necessary to obtain medial care.  The expense still exists.  

5 or so years ago, we took this a step further and asked a IRS panel the following:

If a participant financed the medical care via credit card or medical loan service, is there still an eligible hardship (since they were able pay for it through other means)? 

Panel said yes, it was the expense of the medical care that triggered the hardship.  Taking a hardship distribution to pay a credit card used to pay for medical care was still a hardship within the safe harbor rules.  

 

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RBG - how do you prove that the balance on the credit card is solely due to eligible medical expenses?  Also, with credit services like Care Credit, you can use that card to pay the veterinarian, for massages, cosmetic services and other things that are not eligible medical expenses.  I may be splitting hairs but once you let a participant take a hardship to pay a credit card balance that may be partially atributable to an eligible medical expense, you can really open hardship withdrawals to abuse.  With that being said, I am curious to know if anyone on the panel has had an audit where any (large plan or government) auditor asked a lot of questions about the evidence presented for a hardship.  Also, is anyone lettting participants self-certify hardship withdrwals using a Substantiation Form or something similar?

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Adding to Pam Shoup’s questions:

Why would a plan’s administrator not use the IRS’s method for not receiving source documents and instead relying on the participant’s written statement (made under penalties of perjury)?

The hardship self-certification method now is in the Internal Revenue Manual.

IRM 4.72.2.7.5.1 (08-26-2020) https://www.irs.gov/irm/part4/irm_04-072-002#idm140377115475856

Under that method, an IRS examiner must not ask for source documents unless:

1)        the notice to participants or the claim “is incomplete or inconsistent on its face”; or

2)        some participants received at least three hardship distributions in a plan year, there is no “adequate explanation for the multiple distributions”, and the examiner’s manager approves the request for further information.

If a plan’s administrator and its recordkeeper or TPA design the software correctly, #1 would never happen (except for a paper claim, and then only if the claims administrator is careless).

And #2 seems unlikely unless abuses are bad enough that the examiner is motivated to do the extra work of getting her manager’s approval.

Further, may a plan limit hardship distributions to no more than two in a year?

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At least one formerly prolific contributor to these forums believes that the summary substantiation method should be avoided, although he did not go into much detail as to why.

Under the new hardship regulations, a plan administrator is also required to obtain a participant's written certification that they do not have enough cash or liquid assets to satisfy the need. The plan administrator may rely on that certification unless they have actual knowledge to the contrary.

A plan sponsor may limit hardship distributions to 2 per year.

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C.B. Zeller, thank you for reminding us about another discussion, and for your answers.

Larry Starr’s observations might have been influenced by the unusual situation presented.  And if his view was general, it might reflect his clients’ plans, which typically do not provide participant-directed investment, and his firm’s services.

The IRS’s without-source-documents method can work if the plan’s administrator and its service providers carefully meet all conditions of the regulations and that method.

Others’ thoughts?

Is there a downside to limiting hardship distributions to no more than two in a year?

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  • 4 weeks later...
On 4/20/2021 at 1:38 PM, Gilmore said:

If #1 is a "Yes", assuming the plan document allows for additional hardship restrictions, is it acceptable to say for example, that hardships will only be allowed for an expense that occurred no more than 6 months from the date of the request?

I guess it might seem acceptable if you've never experienced a large surprise medical bill from a private-equity owned medical practice.

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