Access to Safe Harbor money

[Guest Hartnett123]

While I am clear that a participant cannot access Safe Harbor money in a Hardship situation, can they access that money for a plan loan?

[Mike Preston]

Yes. In fact, they have to. Before a hardship is taken, the maximum loan must be.

[Brian Gallagher]

I thought that if the plan loan isteslf would increase the amount of the need, that a hardship could be taken without it.

[Harwood]

Generally, a plan loan does not increase the specific need that is stated in the hardship. I think the fact that a loan deduction will decrease your cash flow does not allow you to skip the loan and move immediately to hardship.

The one exception is when a plan loan deduction might make one less credit-worthy to an outside mortgage lender. For purchase of a principal residence, you may be able to forgo the loan and go directly to a hardship distribution, because the loan deduction would increase the need stated in your hardship request.

Of course safe-harbor contributions are not eligible for hardship distributions.

[Alf]

I always understood that there is an "informal" exception that allows one to skip the loan requirement where it would not be enough to satisfy the hardship. Does anyone know if that is too aggressive a position or is it actually based on a ruling or ASPA comment?

[Guest Bob K]

Alf:

The exception that you refer to is stated in the newly proposed 401(k) regulations.

However, we are not allowed to rely on them until the plan year that begins no sooner than 12 months after they are finalized.

[R. Butler]

The exception that you refer to is stated in the newly proposed 401(k) regulations.  However, we are not allowed to rely on them until the plan year that begins no sooner than 12 months after they are finalized.

That exception has been in the regs for awhile; it is found in 1.401(k)-1(d)(2)(iii)(B).

I only recommend using that exception in very limited circumstances.

[Harwood]

The exception exists in "facts and circumstances", not "safe harbor" hardship regulations.

I find it fascinating that Corbel documents use "safe harbor" for hardships, yet they slipped the "facts and circumstances" exception into their IRS-approved GUST document.

[R. Butler]

The exception exists in "facts and circumstances", not "safe harbor" hardship regulations

Agreed, I didn't read carefully enough. Many practioners, howver, would actually still apply that exception to the safe harbor rules because there is no guidance one way or the other. Silence doesn't mean you can't apply it. I have never thought about it & don't know what I'm not sure what I'd do. In all circumstances I would feel more comfortable if there was a legitimate basis to reject the loan.

[ccassetty]

Bob K, could you provide a cite in the new regs for the exception you refer to in response to Alf's question about an exception if the maximum loan amount won't meet the need? I went back to try to find it and couldn't. Or, perhaps I misunderstood Alf's question.

The cites given in later responses are for the exception to the loan if it creates an additional hardship.

In any case, the participant has the option of taking the loan, then if needed, take the rest of the available account balance in a hardship withdrawal.