Hardship and Loans

[kocak]

I'm looking at somthing that was prepared for a CPA's CPE credit that reads as follows:

"Because the employee has alreadygone through all available plan loans and still needs cash, a hardship withdrawal signals the immediate default on the plan loan, which in turn will be treated as a distribution subject to income tax and possibly a penalty tax ona premature distribution. Hence, the amount of the hardship withdrawal may need to be grossed-up considerably."

Could this be true? If a participant has an outstanding loan, then takes a hardship, is the loan a deemed distribution? I've never heard of this?

Comments are MUCH appreciated.

Michele

[mbozek]

One of the problems with some CPE materials is the quality of the information and lack of references. As far as the IRS regs are concerned thre is no default event as long as the loan is repaid. Also I dont know of any such restriction in making hardship distributions. Perhaps you should ask the author of the CPE materials for a citation of authority for such a statement.

[RCK]

Seems to me that the CPE author is confusing a hardship withdrawal and a bankruptcy filing. Bankruptcy would nearly always lead to an automatic suspension of loan payments and subsequent default of loan.

RCK

[Guest b2kates]

Michele,

I agree with the above. Loan default is a state law issue. There would be no "automatic" default. Default only occurs should the terms of the loan not be honored; i.e. no payments made.

The rest of the language seems to follow the general hardship rules.