Return Hardship Withdrawal

[Guest Kemily]

A participant takes out a hardship withdrawal and doesn't actually get the house. Can they return the money to the plan ? What are the ramifications of this issue? Thanks for all your help.

[mbozek]

two questions: did the participant cash the check from the plan? Was the hardship withdrawal distributed in 2002 or 03?

[Appleby]

mbozek,

I get the cashed check piece, by why 2002 Vs 2003?

If the check was cashed or if the plan is not willing to void the check, isn’t the issue a dead one since hardship distributions are not rollover eligible?

[mbozek]

Not necessarily- there is precedent under the tax law for recinding a contract to avoid adverse tax consequences if the recission takes place in the same year as the taxable event, the parties are placed in the same position after the recission as before the contract and state law permits a recission. (PLR 9829044). In this case the participant intended the distribution to be for the purchase of a residence. The problem is that the employee may have to return the amount of the taxes withheld to the plan. The plan would need to retain tax counsel to determine whether recission is available.