Hardship & Loan

[Guest yvonne001]

A PARTICIPANT IN A PLAN NEEDS A HARDSHIP DISTRIBUTION TO AVOID FORCLOSURE ON HER HOUSE. THE PLAN HAS A LOAN PROVISION. DOES SHE HAVE TO TAKE A PLAN LOAN 1ST BEFORE SHE CAN TAKE THE HARDSHIP? WE KNOW SHE WILL NOT BE ABLE TO PAY THE LOAN. IS IT NECESSARY TO HAVE HER DEFAULT ON THE LOAN BEFORE SHE TAKES THE HARDSHIP? OR CAN SHE JUST TAKE THE HARDSHIP SINCE WE KNOW SHE CAN'T MAKE LOAN PAYMENTS?

[QDROphile]

If the plan's loan provisions were drafted competently, they would say that a loan will not be made if the fiduciary does not expect it to be repaid. In your situation, a loan is not available under that standard, so the hardship requirement of borrowing under the plan to the extent available is satisfied.

But so few loan programs are written and run properly ... .

[Brian Gallagher]

yvonne,

no offense, but please take caps lock off next time...much easier to read.

:-)

[JanetM]

Will depend on the plan. Our DC plans require the participant exhaust the loan provision and all other available avenues of funds. Of course we take the available avenues question at what the participant says. The loan provision is carved in stone.

What does the plan say?

[MWeddell]

Regardless of whether the general test or safe harbor is used for the resources half of the hardship withdrawal criteria, one must take all available nontaxable loans from the plan. If the plan fiduciaries know that she doesn't intend to repay the loan, then the DOL loan regulations say her loan request should be quickly denied and then she can take the hardship.

However, most 401(k) plans (or at least most that I work with) require that loans be repaid from payroll withholding and that the participant give an irrevocable consent to have her pay withheld. It that's the case, the loan wouldn't be denied because she would be likely to repay it.

[QDROphile]

MWeddell makes a good point, but despite the payroll deduction, someone on the verge of bankruptcy could be denied a loan because the bankruptcy would thwart the repayment arrangement. The fiduciary has a serious judgment call to make.

[Guest yvonne001]

Thanks for your help everyone. I have forwarded these replies to the person that was asking me. Sorry for the all caps posting! I will remember that for the next time.