Hardship Distributions

[Guest JAG]

A participant took out a hardship distribution, cashed the check, paid the taxes and penalties. She took the distribution to use towards downpayment of primary residence and the closing fell through. Now she would like to redeposit the money into the plan and have the taxes credited back to her account. It seems impossible to me. Does anyone have any experience with a similar situation?

[RCK]

I agree with your tentative position, assuming that you use standard safe harbor hardship language. The hardship was final when you approved it and ordered the check cut. The fact that she did not use the hardship distribution check as she (and you) expected it to be used is immaterial.

I'd tell her it is too late, that it is not a reversible transaction, but that she is undoubtedly going to try another purchase and she should save the money for that.

In reality, she could probably come back to the plan in a month and get a whole new hardship distribution (I think that we have a few people who have done this).

RCK

[Guest earthy]

I have never heard of this but the tax consequences to the participant seem irrefutable in light of the fact that the IRS will never permit an "eligible rollover distribution" to occur once the 60-day period has expired. IRC section 402©(3) and IRS Notice 93-26.

This would be facts and circumstances loophole if permissible. Several PLR's say no; re: 7945030 (Unity Savings of Chicago 1979 ruling).

[QDROphile]

A painful lesson. Next time for a home purchase, write the check (net of withholding) to the escrow agent. You will have a better argument that the distribution failed and you can take the money back. Not a perfect argument, but a better one.