Hardship Withdrawals

[Guest cynthiar]

If the plan document allows for loans, must a participant take a loan before a hardship distributions?

[Brian Gallagher]

A person must take all available loans available from all of the employer's plans. however, if the 401k loan would make the person not creditworthy for other loans, then the loan doesn't have to be taken.

[Kirk Maldonado]

The loan (from the plan) may not be available if the person isn't creditworthy.

[jquazza]

When was the last time you've seen a plan administrator run a credit report on a participant?

[Guest Joel Lee]

The loan is automatic because it is secured by the participant's account balance...is it not?

[Kirk Maldonado]

Many of my clients have provisions in their plans that deny any subsequent loans to somebody that has defaulted on a prior loan.

Making a loan to somebody that you know is not (currently) creditworthy may be a breach of fiduciary responsibility.

[Brian Gallagher]

By not creditworthy, I meant that a bank may deny someone a loan because of the 401(k) loan.

From the Pension Answer book 2003:

"For example, the need for funds to purchase a principal residence cannot reasonably be relieved by a plan loan if the loan would disqualify the employee from obtaining other necessary financing."

Maybe creditworthy wasn't the best word I could have used.

[FundeK]

A person must take all available loans available from all of the employer's plans. however, if the 401k loan would make the person not creditworthy for other loans, then the loan doesn't have to be taken.

Does this apply to plans that use facts and circumstances or safe harbor?

[Brian Gallagher]

I took the quote (two posts above) from Q 27:72 from Pension Answer Book 2003: "How is a hardship withdrawal determined to be necessary (Part 2) under the facts-and-circumstances test?"

[Guest svatty]

Remember ... that if taking a loan would just make the hardship worse (i.e., now they will have even less take home money to pay the loan) .. then they also don't have to take the plan loan prior to getting a hardship distribution.

[Brian Gallagher]

where is that in the regs? about the addtional hardship of the loan?

[TBob]

I think the cite you are looking for is in the last paragraph of Reg 1.401(k)-1(d)(2)(iii)(B)

The IRS uses an example regarding a residence loan. The financial need can not reasonably be satisfied if obtaining a plan loan would disqualify the employee from obtaining other necessary financing.

For another example, if a participant is being evicted or forclosed upon because they can't make their payments, I think it makes sense that if they add payments for a plan loan to their already ugly financial load and further reduce their take home pay, it will probably make their hardship situation worse.