Hardship request

[Guest Achilles]

Plan allows hardships for any of the four reasons.

A participant needed a hardship to prevent a foreclosure, and provided the necessary back-up.

Due to time constraints on receiving the dollars, she borrowed the exact amount from her father, and now wants the hardship to be able to pay her father back.

On November 30th, she had a valid hardship reason. On January 4, 2005 she has no foreclsure issue, therefore, no valid hardship reason.

Should the hardship request be disallowed?

Thanks.

[austin3515]

No, there's rules somewhere about "tracing" - i.e., you can trace the hardship to her father's loan and to the repayment of the father. I know it was discussed in more detail for loans for homes, when the loan came after the closing, but because of the traceability it was clear that the loan was for a home (and therefore the term could exceed 5 years). I bet the same rules would apply. Try a search on these boards for "tracing"

[GBurns]

Doesn't "at time of application" or "at time of approval" matter more than "at time of eventual slow processing" or "at time of delivery of funds"?

When was the check actually drawn? At the time the check (distribution) was actually drawn, was it known that the situation had changed?

Did the plan administrator know that the father was going to lend the money but did not inform the participant that this would disqualify her application etc?

[austin3515]

I'm not convinced that it would disqualify the situation. The hardship still exists even when through a surrogate (i.e., she owes the father because of the hardship).

As the distribution didn't exceed the need, I don't see any reason to get overly excited. In what context would it ever come up, anyway?

[Guest jdw]

So have daughter formalize loan from father by signing note with an acceleration clause and granting father a security interest in the house. Daughter then does not make next payment due under note. Father then sends daughter letter accelerating remaining loan balance and threatening foreclosure of security interest. Daughter then gets hardship distribution, since it is "necessary to prevent . . . foreclosure on the mortgage on that residence."

[WDIK]

No, there's rules somewhere about "tracing"

I thought that the tracing rules applied to loans. (Q&A 7 of the 72(p) regulations)

Do they apply to hardship distributions also?

Doesn't "at time of application" or "at time of approval" matter more than "at time of eventual slow processing" or "at time of delivery of funds"?

(emphasis added)

This point has merit. I would get yelled at (by the participant, the client and the boss) if a hardship requested wasn't processed within two weeks, let alone 35 days.