Hardship Request - Purchase of Principal Residence

[Guest K.C.]

A participant has requested a hardship distribution for costs related to the purchase of a principal residence. The participant has a letter from a mortgage broker stating that the participant needs the distribution to cover the down payment, closing costs, and to "qualify for the mortgage" (i.e. pay down other debt so that the participant will be approved for the mortgage).

Has there been any guidance released anywhere indicating that a hardship distribution to pay down other debt so that a participant can qualify for a mortgage is permissible as a cost directly related to the purchase of a principal residence?

Thanks for your help with this.

[ERISAnut]

You typically do not have to split hairs on these types of issues. The fact that he is purchasing a residence deems a hardship to exist. This is regardless of anything else (i.e. other debt).

Now, as to whether a distribution is necessary in order to satisfy the hardship is a separate analysis. Even here, a distribution is deemed necessary if maximized all other distributions available under all plans of the employer, etc...........

Therefore, I would not put too much stock into what he actually does with the funds once received. The rules are written to make the determination easy and avoid your analysis. Is he purchasing a house, yes. Is a distribution from the plan necessary in order for him to purchase the house; maybe. But it is deemed necessary when the certain conditions are met (i.e. suspending additional contributions for 6 months, etc....)

Please forgive me for not providing the exact details, but they would be well documented in the plan.

Hope this helps.

[Guest Sieve]

I agree with -nut that you really don't have to follow the distribution to see how the funds are used, but you certainly do have an obligation to make sure that the request is proper. The rule is not whether the funds are necessary for the participant to purchase the principal residence, but whether the funds are necessary, as KC indicates, to cover "costs directly related to the purchase" of the home--and, if they are, then there is a deemed imediate & heavy financial need. But, I don't see how paying down debt to be eligible for the financing is a "cost". Even if it is a cost, I do not see how it is "directly related" to the home purchase. If the harship distribution request is no greater than the amount necessary for the down payment & closing costs (plus reasonably anticipated tax payments resulting form the distribution)--and that may require a new letter from the mortgage company--then it's a hardship, no matter how the participant eventually uses the $$.

I take the position that you should be conservative when determining hardships for a 401(k) plan. Others on this board are more aggressive (liberal?) in that regard. You have to decide where you fall along that continuum and act accordingly, especially since the guidance in the area of hardship distributions is basically non-existent.

[masteff]

The participant has a letter from a mortgage broker stating that the participant needs the distribution to cover the down payment, closing costs, and to "qualify for the mortgage" (i.e. pay down other debt so that the participant will be approved for the mortgage).

Does the letter actually say "pay down other debt" or just "qualify for the mortgage"? If it actually references paying down other debt, then have the participant ask the lender for a revised letter that only discusses down payment and closing costs.

Or even better, ask for a copy of a good faith estimate of closing costs which should show the exact amount of cash the buyer has to bring to the closing, which includes the down payment and the closing costs.

A good faith estimate is your #1 form of documentation for purchase of a residence.

[QDROphile]

The best practice is to send the money to escrow, with instructions. Then if the deal fails, you don't have to wonder about whether or not the plan can take the money back