loan and hardship at same time

[Guest mam]

I have a plan that is concurrently adding a loan provision and a hardship provision.

the h/s provision is safe harbour, and the loan minimum is $1,000.

say a participant with a $50,000 fully vested balance is faced with a $10,000 h/s. can he take a loan for the minimum $1,000 (to fulfill that requirement) and request the remaining $9,000 as a h/s? or must he take the maximum loan he's allowed, by law, which in this case would be the entire $10,000?

[KJohnson]

Generally Participant must max out all available plan loans before receiving a hardship. See 1.401(k)-1(d)(1)(iii)(B)(4).

However there are certain exceptions if the plan loan would actually "increase" the amount of the hardship need. (i.e. a participant would not have to take out a plan loan if that loan would disqualify the participant from obtaining a traditional mortgage for a home. In such an instance the plan loan would actually "up" the amount needed as a hardship distribution)

[Guest mam]

Thanks, KJohnson- I've been trying to find a place on the web where i can print out Section 1.401(k) that you reference. Can you tell me where to go? thanks.

[Guest]

GO to thomas' the library of COngress web site and it's in the CFR.

[MWeddell]

Assuming that the plan only allows a participant to take one loan at a time, I think the participant's strategy suggested by mam would work.

Note that the participant will have income tax withheld and owed on the $9,000 hardship withdrawal and hence could request more to compensate for the taxes on the withdrawal itself.

[KJohnson]

MWEDDELL MIGHT BE RIGHT FROM A TECHNICAL STANDPOINT BUT I WOULD BE CAREFUL. I THINK HE CONTEMPLATES:

1) TAKE A $1,000 LOAN ON MONDAY FROM THE PLAN.

2) ON TUESDAY TAKE YOUR HARDSHIP. ASSUMING THE PLAN HAS A ONE LOAN AT A TIME POLICY, YOU SHOULD BE ABLE TO TAKE THE FULL AMOUNT BECAUSE YOU HAVE ALREADY "MAXED OUT" AVIALABLE LOANS.

MY QUESTIONS ARE: 1)WOULD THE IRS VIEW THIS AS SUBTERFUGE, AND 2) WOULD YOUR HARDSHIP "NEED" BE ONLY THE $1,000 TO REPAY THE PLAN LOAN THEREBY GIVING YOU RENEWED ACCESS TO A LARGER LOAN FROM THE PLAN.

[MWeddell]

KJohnson, you have correctly summarized my position.

The second point you raise is quite interesting. I don't know that I'll change my mind but it's an excellent point.