Hardship Withdrawal - Prevent Foreclosure

[Guest saotampa]

Can anyone give me a specific reg that explains taking a hardship to PREVENT foreclosure? The participant does not have a foreclosure notice from the bank but they are telling her that she should pay down her mortgage as much as she can so that she can refinance. I have explained to the HR contact that this does not qualify for a hardship as she is not behind on her mortgate and she can't take a hardship to make mortgage payments. The participant says that she wants to avoid foreclosure and that the regs do not clearly state that she can't take it out now to avoid foreclosure. I've spent the afternoon looking but nothing is coming up. I did find another post from benefitslink

"I've never found expanded definitions for any of the deemed hardship situations -- medical care, education, eviction, foreclosure, funeral, etc. There's better guidance for what constitutes the overall principle of "hardship". You might want to read Reg. Sec. 1.401(k)-1(d)(1), and there are some good examples at Reg. Sec. 1.401(k)-1(d)(2). After you've determined that a participant does, indeed, have a hardship situation, you can usually apply the subset. "

I have not been able to bring up the regs listed above after doing a search. Any thoughts are appreciated.

[Laura Harrington]

Here is a link to the Treas. Reg. you cited above: http://www.taxalmanac.org/index.php/Treasu..._1.401%28k%29-1

Unfortunately I do not think there is any specific guidance on this issue.

I had a similar situation a few weeks ago except the participant was behind by 1 mortgage payment. She had no imminent threat of foreclosure (no notice of foreclosure from the bank, etc.). I told the employer there was no specific guidance, just what is stated in the regs, and then left it in their court to decide whether or not the employee qualified for a hardship distribution.

[Guest saotampa]

Thanks for the link to the regs. I am going to leave it to the trustees discretion on whether or not they want to proceed with this as a hardship. I've already stated the facts and the participant doesn't agree with them, so it will be the trustee's responsibility to prove the hardship in case of audit. Since the plan started in late 2006, I can only imagine that this person probably has $500 available for a hardship anyway and I've spent an afternoon looking for specific language...lol....

[Lori Friedman]

I don't want to post a lengthy document at this Message Board, so I'm sending the regulation sections to you by email.

[masteff]

Here's a cleaner source: http://edocket.access.gpo.gov/cfr_2007/apr...r1.401(k)-1.pdf

The key is that you have to take the subparagraph that permits hardships for foreclosure in the context of the paragraph it's in.

Foreclosure is in 1.401(k)-1(d)(3)(iii)(B)(4)

If we look at (d)(3) as a whole, we find the regs are telling us that the hardship must be an "immediate and heavy financial need". They've merely stated that a foreclosure will presumptively meet that "immediate and heavy" requirement.

Paying down a mortgage that is not in arrears in order to refinance that mortgage is not a hardship because the threat of foreclosure is not immediate.

If, on the other hand, the mortgage is past due and bank has offered to refinance if the mortgage is brought current, then it's a simple matter of the bank providing a letter that states "pay $xxx now in order to prevent foreclosure proceedings".

The mortgage does not have to actually be in foreclosure for the risk of foreclosure to be immediate... but the mortgage does have to at least be under a legitimate and pending threat of foreclosure (thus to "prevent" foreclosure). You can't "prevent" something that is not imminent.

[Guest saotampa]

Thanks to everyone for responding. I will provide the plan sponsor with the regs so that she can let the participant know what she is requesting does not constitute a hardship, as I have been telling her all along. I appreciate everyone's comments.