Loans vs. Hardship (or both)

[Guest PAINPA]

I have a client that offers loans and hardships in the 401k.

The plan sponsor has an employee with a $6k balance all employee deferral money (no Match).

He is requesting $4k as a hardship.

Doesn't the employee have to take the 50% loan of $3k and then take a hardship for $1k?

Or is there something we are missing that they can directly go to the hardship provision since there is not enough money for a loan?

Thanks for any advice...

Jim

[Lame Duck]

You might want to check the actual plpan language regarding loans to find out if the entire $4,000 can be borrowed. Many plan documents contian the language of IRC 72(p)(2)(A)(ii), which permits a loan to be made so long as it does not exceed the greater of one-half the vested account balance or $10,000. If the language exists, it may be possible for the participant to borrow the entire amount, rather than only part of it.

Of course, the determination of the loan policy is at the discretion of the Plan Administrator. If he loans more than the 50% basis in this case, he will need to apply this policy in a non-discriminatory manner in the future.

[R. Butler]

If facts & circumstances see §1.401(k)-1(d)(3)(iv)©(5).

If safe harbor see §1.401(K)-1(d)(3)(iv)(E)(1).

Also check your document for loan amounts.

C) Employer reliance on employee representation. For purposes of paragraph (d)(3)(iv)(B) of this section, an immediate and heavy financial need generally may be treated as not capable of being relieved from other resources that are reasonably available to the employee, if the employer relies upon the employee's representation (made in writing or such other form as may be prescribed by the Commissioner), unless the employer has actual knowledge to the contrary, that the need cannot reasonably be relieved—

(1) Through reimbursement or compensation by insurance or otherwise;

(2) By liquidation of the employee's assets;

(3) By cessation of elective contributions or employee contributions under the plan;

(4) By other currently available distributions (including distribution of ESOP dividends under section 404(k)) and nontaxable (at the time of the loan) loans, under plans maintained by the employer or by any other employer; or

(5) By borrowing from commercial sources on reasonable commercial terms in an amount sufficient to satisfy the need.

(D) Employee need not take counterproductive actions. For purposes of this paragraph (d)(3)(iv), a need cannot reasonably be relieved by one of the actions described in paragraph (d)(3)(iv)© of this section if the effect would be to increase the amount of the need. 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.

(E) Distribution deemed necessary to satisfy immediate and heavy financial need. A distribution is deemed necessary to satisfy an immediate and heavy financial need of an employee if each of the following requirements are satisfied—

(1) The employee has obtained all other currently available distributions (including distribution of ESOP dividends under section 404(k), but not hardship distributions) and nontaxable (at the time of the loan) loans, under the plan and all other plans maintained by the employer; and

[Guest PAINPA]

The Plan Sponsor is saying that the former TPA would automatically give them a hardship. Regardless that a loan was available because they do not want to pay it back.

Our standing is that you must take the route of a loan before you can "TAP" it as a hardship.

The plan sponsor wants us to go directly to the hardship method.

I guess my question is can I skip the loan route becuase the amount cannot be fully obtained.

The $$$ is for a 1st home purchase.

[E as in ERISA]

What are the plan terms and what is the method by which "hardship" is determined?

In most cases, the plan will either have the safe harbor provisions or include some reliance on the employee's representations as to the hardship.

As noted above, the safe harbor rules state that the hardship cannot be "deemed" necessary if there are other distributions (e.g., loans) that would be available first.

As also noted above, even if the plan is not safe harbor, the rule applies. Because the employer cannot rely on an employee's representation of the need if they know that there are other distributions (e.g., loans) available.

If the plan is not safe harbor and does not rely on employee's representions, but rather does a full blown investigation into the employee's financial condition, then I suppose it may be possible to ignore the fact that a loan is available if the total facts demonstrate the need despite the availability of the loan. But I'm guessing that this employer is relying on representations of need?

Now the new regulations do say that the employee doesn't have to take any counterproductive action...

[Guest CAM223]

We have had a similar situation with a takeover case. If the participant is able to make loan payments--he must take out a loan. There are definite circumstances which can trigger a distribution. If you grant hardships routinely, you in effect will have distributions on demand. Many IRS auditors would have an enormous problem with this situation.

[Guest PAINPA]

The plan document is for hardship Safe Harbor reasons.

Of which the plan administrator is saying the $4k requested does fit in those provisions.

[QDROphile]

Somebody needs to be fired.

[R. Butler]

I hope its not me.

[Guest PAINPA]

Thanks to everyone...

Sometimes when a plan sponsor is so persistent I question myself on maybe I should have attended that seminar on hardships last summer that I missed and thinking new regulations were implemented that I slept thru.

[E as in ERISA]

One other thought: If the loan provisions limit loans to certain events and this is not one of those events. Unlikely. But maybe there are not loans for college tuition because those are readily available. But the hardship provisions allow distributions for tuition.