TPAJake

Absolutely, but there's that time machine problem again in step 3--They use "were" rather than "will be". The note is already written & signed by that point. Besides, if they used a few bucks to fill the house with furniture & buy a new refrigerator, they still used the proceeds to purchase the house first. And it does not say that 100% of the loan proceeds must be used to purchase or construct a primary residence. Purpose & documentation are very explicit, but not amount.

Got that right! I can't tell you how many times I've heard "the law says I can take a loan from my 401k, what do you mean THIS plan doesn't allow loans?" or my personal favorite "I just want to close out my 401k, it's my money"

So let's follow your logic then, using my example from earlier: $25k loan request for a $100k house & you only need $10k to close, I deny the extended amortization on $25k. If you only want $10k, I can let you pay out to 10 years, but if you want $25k, you have to pay it back within 5 years. In the real world where I'm talking to people who loathe the IRS, a few possibilities exist for what happens next. Most likely I get a fresh set of closing docs showing they need $25k to close & I wasted everyone's time denying it the first time. Option 2 is they agree to the 5 year repayment schedule, the mortgage underwriter sees that new debt obligation, decides it's too high & refuses to approve closing, deal falls through. The third possibility is they decide to take a hardship for the $10k instead & that money never gets back into the Plan. I'm sure there are more I can't think of right now, but you get the picture, there's no upside to splitting hairs about how much they really need for a rez loan. If the IRS challenges extended amortization 3 or 4 years later, or an auditor asks for documentation the next year--Here's the sales contract & the Participant's phone number so you can ask them what they really did with the money. I'm no Attorney & my job is to be the solutions side of the K industry, so I do end up oversimplifying things sometimes. I appreciate these conversations because they remind me of just how intricate the rules are in print. Just because I've never had the IRS, DOL or an auditor disagree with one of my transactions before does not mean it will never happen!

I agree with you from a philosophical standpoint but during the approval process, how could you possibly prove that the funds will actually be used in acquiring or constructing the qualified residence? You would need a time machine, because people do stupid things after you give them money.

Correct, that is my opinion--If you want to borrow $50k over 6 years or more (and the plan doc allows that), I don't care how much your house is going to cost or how much you need to close, I only care that you provide me proof of the home purchase. Unless there's some new & improved guidance I haven't seen, IRS is silent on amount, their requirements center around purpose & documentation to justify extended amortization. That is in stark contrast to requesting a hardship for the same home purchase. In the case of hardship I do have to verify that the amount requested is necessary to satisfy the need. The rub: $25k loan request for a $100k house & you only need $10k to close, yes you get your loan & extended amortization. $25k hardship request for a $100k house & you only need $10k to close, no you only get the $10k.

Based on the fact that he is purchasing a principal residence & therefore qualifies for the extended amortization, which I have the documents to prove. Like our previous discussion, if he uses that money for something else, that's outside of my control--I have a complete file.

I think you're trying to apply hardship approval concepts to a mortgage loan situation. They have different requirements in documentation & for extended amortization there is no duty to ensure that the amount requested corresponds to the amount of need. If they have enough money, provided a legit sales contract & the document allows it, it's good. However, in this case, I agree that language is iffy & sounds like they just came straight to you from the model home without doing any actual mortgage app. I might ask for a good faith estimate from the lender to go along with that sales contract. Asking for a GFE requires them to have a few things finished at the lender & their 401k funds aren't going anywhere in the next few weeks. I don't like people coming for mortgage-related withdrawals a day or 2 after dropping their $500 earnest money--They still have a long way to go in the process & if this is their first home, they're usually jumping the gun on the amount they'll actually need for closing costs. I give them a call, congratulate them on their big decision, try to make them feel special & let them know the money is here when they're ready, but you need to know their actual closing date. If it's next week, they have something better than a sales contract for your records. If it's 30 or 45 days away, they have plenty of time.

In my experience, RK will only provide this service if it's in their best interest to do so. Where that line is, nobody knows...

Our sister company uses it for their Plan Documents & they absolutely love it. I'm not sure how to go about deleting a document that is already signed, but they do get revised document signatures all the time in those scenarios. There must be a way to nullify the obsolete document.

That's a good question--It would be nice to just leave all those low balance term's at the PEO wouldn't it?

We've done a few of these & we always use the transfer/spinoff method mentioned above if possible. The distribution/rollover dance is a recipe for unfinished rollovers & screwed up loans now, followed by 1099-R issues at year end. And you're right, the PEO is not going to be much help to you.

I know I've heard advisors talk about this issue on implementation calls, but I'm sorry to say I don't remember what their solution was. You are not alone in having this issue, though.

Our loan policy gives them 60 days to pay it off in a lump sum after termination, but I don't think I've ever seen anyone actually do that. Check the doc or loan policy to see what yours says about timing & method.

Another good point, but I think it would be easier to defend option 2 if you're a PA under inquiry a few years after the distribution occurred.

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.

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...

They can't use the same bills twice--That would cause the Administrator to approve a distribution that exceeds the amount of the need

No, which is why I don't say it like that.

I don't assume those are issues common to Trustee directed plans, quite the opposite usually, but if a case is presented, it seems like it would be difficult to defend the Trustee's investment selection in the face of losses--Luckily I have no personal experience with that! It struck me in this case as the CEO keeping his buddies (or personal asset managers) on the Plan to gain some benefit on the personal side. Not the traditional self-dealing scenario, but the name fits. As far as excessive fees, if they're running individual stocks & collecting six figures annually they better be topping the market by a large margin. If their returns are comparable to other plans in their peer group, then a lot of questions start to arise about how appropriate this fee arrangement can be. Sometimes perception is reality... All that aside, I do think that more Plans should be Trustee directed because Participants are not known to be the smartest investors.

I have had that "you can't un-ring the bell" conversation way too many times with Participants. Unfortunately it usually follows a conversation a few weeks prior where I told them to wait until they get closer to the closing date before making that withdrawal...

I would agree you have more operational risks in a Participant directed plan, but a Trustee directed plan seems like a ripe target on investment risks. Self-dealing & excessive fee suits are a lot more common in the news that failure to distribute/disclose.

I appreciate MoJo's position, as I too believe we need to concentrate more on "everyman" if we're ever going to make a dent in the retirement crisis is America. However, this program was never a good idea & there's plenty of places to put your money these days. Betterment.com will open an IRA with no minimum, set up recurring deposits for you, do all your trading & tax reporting, etc., all for .25%. I opened an account with them about 6 months ago as a little experiment, so I could speak intelligently to the Participants who call me every day & it's up 6.5% as of today--I don't ever have to touch it, they do everything. There's a few others using this same model & most of the big names in the industry are currently launching similar products. The gov't has plenty of unfinished business to attend to, they should start there.

That seems very low

I'm +1 with MoJo & RBG

If we're talking about a plan that is large or complex enough to have it's own staff, I cannot imagine any tolerance for lazy hardship reviews--It better be perfect every time. In that scenario, I see the recordkeeper's job as cutting a check & that's it.