hardship for purpose of primary residence?

[MR]

so a guy wants a hardship withdrawal for purchase of his primary residence. the catch is that the residence will be shared with his sister and brother in law and it will be in their names, not his. does this qualify? its his primary residence, so i would think its ok.

[Mike Preston]

If the property is not in his name at all (just in the other two), then I don't think it would satisfy the rules.

[mbozek]

Duh: Why does this participant want to take money from his account for the purchase of a residence in which he will not have any ownership rights? The sister could say that the money was a gift, not an investment unless he has a contract (which is worthless without a security interest in the RE).

[MR]

We looked in the code, and it simply tells you the hardship must be for purchase of your primary residence. So, if this will be the primary residence for the individual and he can prove that, then why would the house need to be in his name? I guess the problem here is that you won't find any specific reference to this particular example in the regs.

[Mike Preston]

MR, I think it is an extraordinary stretching of the plain language of the statute to presume that "purchase of a primary residence" means "puchase IN SOMEBODY ELSE'S NAME a primary residence".

[E as in ERISA]

I have some swamp land in Florida I can sell the guy....or an interest in the Brooklyn Bridge....

[RCK]

On a practical level, MR, what are your documentation requirements for a hardship withdrawal for purchase of a primary residence? For our plans, we are looking for a signed purchase agreement or a good faith estimate of closing costs. If neither of those documents is in participant's name, he does not meet the documentation requirements.

RCK

[mbozek]

The "purchase" of a primary residence requires that the participant have an ownership interest in the residence. I dont see how some one can purchase RE without actually owning it.

[FJR]

I think the premise is in the "purchase" of a primary residence. If it is not in the persons name then is he actually purchasing.

Seems to me an incredible waste of a clients time and money

[MR]

not convinced yet, guys. the regs say, under the deemed hardship distribution standards that a distribution is deemed to be on account of an immediate and heavy financial need of the employee if the distribution is for:

costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments)

if the plan sponsor believes that the employee really lives with his sister and brother in-law and that the money will be used to buy the house, how does it not meet the above requirement?

to be honest, i'd rather tell this guy no, but now i'm intrigued by this.

[mbozek]

How does the plan sponsor know that the employee will use the money to purchase the residence if he does not have any ownership interest? Maybe he wants to take an expensive vacation. I advise plan administrators to have the employee provide a copy of the contract to purchase the residence in order to make sure that the employee is purchasing a home to comply with the regs. I dont know how the employee will provide proof of purchase if there is no ownership interest but then its not my opinion that is at risk.

[FJR]

Here is a twist to your question. Lets say you approve it and then this free loader comes back with requesting another hardship to avoid forclosure. Doesn't own the property, Would you allow it?

[E as in ERISA]

Go look at the code and regulations on any topic. They generally don't contain details about what proof is needed for substantiation. That doesn't mean that the IRS doesn't ask for that proof.... In order to protect the plan and themselves, most plan sponsors, administrators and fiduciaries are smart enough to have procedures in place to obtain documentation of the required facts.

[jaemmons]

Just my $.02. but i thought a purchase by definition means that you obtain something in return for money or its equivalent. When something is obtained it is a possession of its buyer, so how can this individual prove (substantiate) possession when they are not named as the lendee of the home or property, as indicated on the mortgage note (which I believe would be substantiated proof of primary residence purchase)?

In any event, what if the employer wanted to just use facts and circumstances to determine the financial need under Reg 1.401(k)-1(d)(2)(iii)?? If this is going to be the employee's principal residence and in order for him to live there he needs to give his sister and brother in law money for purchasing the home, why couldn't the employer allow for this as a financial hardship?? Just a thought, as I see most of the replies are using the safe harbor determination for immediate and heavy financial need.

[E as in ERISA]

The deed will indicate who is the owner of the house.

[MR]

some of these are good points, but the question remains - where in the regs does it say that the residence in question must be owned by the employee. the regs allow withdrawal for expenses related to the purchase of the primary residence of the employee. yes, evidence would be needed, just like any other hardship request. yes, its this guy's primary residence. suppose instead it was the guy's wife and the house was in her name. maybe he's in the witness protection program or something. anyway, does the fact that he's not on the deed determine whether or not he qualifies?

[Mike Preston]

Originally posted by Mike Preston

MR, I think it is an extraordinary stretching of the plain language of the statute to presume that "purchase of a primary residence" means "puchase IN SOMEBODY ELSE'S NAME a primary residence".

I'm quoting myself, because the answer to your last post is a repeat of what I previously said.

At the end of the day, it is the Plan Administrator who must decide whether the governing language supports their actions. I think it is fairly obvious that there is near unanimity (with your voice being the dissent) that the governing language does not support it. If you choose to give advice that says otherwise, nobody is going to stop you. The question is whether you are willing to assume the responsibility for that advice.

[E as in ERISA]

Under the tax code, the term "principal residence" generally connotes that it is both "owned and used."

[Sandra Pearce]

As an employer I would be very upset if our 401(k) administrator thought this qualified.

[2muchstress]

Seems to me that this hardship is being used to pay rent to the brother and sister. Without ownership in the residence, the participant would just be a tenant who pre-paid his rent. And I would be willing to bet that the IRS would probably assume the same.

I don't see how any rational administrator or sponsor could strectch the language like this. I agree with the last post, if I was a plan sponsor and had my 401(k) administrator telling me this was okay, I would seriously question the credibility of the administrator. (Unless the plan uses the facts and circumstances determination).

[Brian Gallagher]

I would say that this could be satisfied after the fact....if the person can show a cancelled check for the amount of the hardship paid to the bank, that would show he purchased the residence.

as for the fact of primary residence being "owned and used", what about an apartment. hardship rules provide relief from being evicted from a "primary residence", which would include an apartment or rented house. obviously there is no ownership involved, but usage certainly is.

[Sandra Pearce]

The original post said that the employee was applying for the hardship on the basis that the hardship was to purchase a primary residence that the employee would live in but not be named as buyer. The last post suggests that perhaps this should be considered as a hardship to prevent eviction from a primary residence. If so I believe most administrator's would require an eviction notice. If there is one and the employee applied without giving all of the necessary information then this could be reconsidered. Otherwise, I don't think you can assume the eviction.

[Brian Gallagher]

i wasn't trying to equate buying a primary residence with being evicted from one, but rather trying to further clarify the definition of it.

it doesn't make sense that you have to own a primary residence in order to get a hardship to purchase one, but you don't have to own one to get a hardship to be evicted from it.

bottom line...to me, if I'm giving you money to buy a house that will be where I'm going to live (my primary residence), then it should qualify.

am i correct in saying that somewhere on you taxes you have to declare a primary residence? forgive me, I know next to nothing about taxes

[mbozek]

Brian: the Instructions for the 1040 form at A-2 require that a taxpayer own the property in order to claim a deduction for re taxes. I dont believe there is a limit on the number of homes for which RE taxes may be deducted but large state tax deductions can result in the AMT kicking in.

[2muchstress]

I think the last few posts have misinterpreted the original intention of this thread. You can be evicted from an apartment, and that would constitute a hardship. Nobody would argue with that.

In this case, a participant is seeking a hardship to PURCHASE a primary residence. He doesn't own the residence yet, so you cannot equate it with the eviction clause.

The issue is that the participant who is supposedly "purchasing" the primary residence, will have no ownership in the residence which he is supposed to be purchasing.

You will not find anything in the regs about this scenario, because we all know from experience that regs do not address things on a common sense level.

[pmacduff]

Plus - an apartment can be your primary residence and you don't "own" that.......................

[2muchstress]

But you do not purchase an apartment, you rent it.

The safe-harbor hardship definitions say you can get a hardship to prevent foreclosure or eviction from your primary residence. If you are getting evicted, this would mean that you are currently renting, and not owning. This has nothing to do with the original post. I'm sure all of us would agree that you can receive a hardship to prevent eviction from your principal residence.

However, the original post was about a purchase of a primary residence.