Hardship Withdrawal

[Guest scparlee]

Participant has a hardship which is not included in the safe harbor rules, i.e. downpayment on a franchise. Participant is separating from service and could take total distribution, but the timing of the ability to take the distribution could put an extreme hardship on the family -- i.e. no income until downpayment can be made. Participant has other expenses which do qualify (education expenses for wife). Does it matter where the exact dollars go? I mean all expenses are paid from family resources, so a shortage of one kind effects the ability to pay other expenses.

Wife does get a student loan that could cover just tuition and books for the next semester (not all of the estimated cost of attendance bythe school, room and board, etc.), but the regulation seems to state that education expenses due over the next 12 months qualify.

So, I am trying to figure out what if any safe harbor withdrawal can be made.

Thank you!

Stephanie

[FundeK]

If the Plan Sponsor knows that the hardship will not be used for one of the safe harbor reasons, I do not think it should be issued.

If the Plan Sponsor had no idea, and the participant submitted paperwork showing their home being foreclosed on, or tuition bills, then they could issue the hardship. What the participant does with it after that is their own business.

Having prior knowledge that the money will not be used as it is intended would lead me (personally) not to issue the hardship distribution.

[Guest scparlee]

I am sorry I should have clarified, my knowledge is from the participant side, not the administrator side in this case. I am a financial planner with personal knowledge of the case. Employer has not been approached about the withdrawal as of yet. I want to make sure that the participant is not running afoul of the law, by asking for the withdrawal.

Stephanie

[FundeK]

If the participant is terminated he will be unable to get a hardship which is an in-service withdrawal. Also, I am assuming that if you are asking about a hardship, the participant is not at least 59 1/2. An, if he isn't, taking a hardship and incurring the taxation and penalties may not be such a great idea.

If the participant truly has tuition bills, etc. that qualify for a hardship, then he could submit them for a withdrawal. The money he would have used for the tuition, etc. will now be diverted to his downpayment on the franchise, and the hardship will be used to pay the tuition.

[Guest scparlee]

I am sorry I may have posted my question backwards. Person is separating from service and will be taking a partial or total distribution to get into next position. Person understands tax consequences but has no alternative. Concern arose that the distribution could be delayed by administrative issues after separation, leaving the family with no income and no ability to pursue the new position until the distribution could be processed. I am not sure if this is a valid concern .. are there any rules about timeliness of distributions on separation?

So I was looking at the possibility of a hardship withdrawal. The education provision looked like a viable option to me, but I don't know how you document tuition bills anticiapted over the next 12 months.

Thank you for the information.

Stephanie