hardship calculations

[Guest Wolves1962]

Do you have to subtract an outstanding loan balance to get the total amount a participant can have as a hardship distribution?

[stephen]

I do not think the document would allow for this. Nor can I think of how this could work.

What does the document say regarding hardship distribution sources?

[Guest Wolves1962]

The plan document does not state anythign regarding distributions as far as source however the loan needs to be offset with 50% of the balance to receive a loan so if you take away that money the loan is the only employee money left. Hardships can only be employee money. The distribution needed would then leave no money in the employee account. The loan then would not have any money to use as an offest. The loan document clearly indicates that the money to be givcen is 1/2 of the vested account balance. If the hardship distribution is taken there will be no money left for the loan offset.

[stephen]

I believe that the participant can take their deferrals as a hardship leaving only the loan balance in the plan. The loan is secured initially by the account balance but going forward there is no security. For example, if the defarral account lost money due to investment losses you are not going to penalize the loan holder in ant fashion.

[Guest Wolves1962]

According to IRS Notice 2000-32

A Hardship distribution cannot exceed the participants withdrawal basis, which is the participants total elective contributions as of the date of withdrawal REDUCED by the amounts of previous distributed on account of hardship ( i.e. the hardship loan )

[Guest Noodle]

What do you mean by "hardship loan"? What does the loan have to do with the hardship?

- Noodle

From TAGdata:

"Question:

Hardship after Loan - If a participant takes out a loan, can they take out the remainder of their account through a hardship, disregarding the collateral requirements of the loan?

Answer:

Yes. For example, let's assume that the individual 401(k) account only has elective deferrals and has no earnings. The value of his account is $20,000. He originally took out a loan for $10,000 and needs an additional $10,000 for his hardship. Can he withdraw the $10,000 even if it would leave no collateral for the original loan?

Assuming the loan is a directed investment of the participant, the plan can allow the participant to withdraw the non-loan balance as a hardship distribution. ERISA regulation §2550.408b-1 states that the 50% limitation on use of the participant's account balance as collateral is applied as of the date of the loan. Regulations provide that a hardship distribution can only be made after the participant has taken "all nontaxable (at the time of the loan) loans currently available under all plans maintained by the employer". Once the loan(s) is taken, the participant has already removed 50% of the account balance. If the IRS meant that, after the maximum permissible loan was taken no hardship distribution could be made, the regulation would not read as it does.

Debra Hobbs, a pension law specialist with the DOL, explained that the reason for permitting only 50% of an account to be encumbered as collateral is to allow the other 50% to be used for other purposes. Both the law and regulations require that sufficient collateral must be maintained such that the plan cannot suffer a loss in the event of a loan default. If the participant uses 50% of the account balance as collateral, and takes a hardship distribution of the remaining 50%, the collateral is the outstanding balance of the loan, as a receivable to the plan. If a participant loan goes into default, the outstanding balance at the time of the default is a "deemed distribution" for tax purposes, but it remains a (now disqualified) loan from the plan. It continues to accrue interest and remains on the plan books as a receivable, until such time as a distributable event occurs. At that time, the outstanding loan balance is offset by the account balance (the loan receivable), and it is reflected as a distribution from the plan. None of this actual distribution is taxable to the participant.

The Tax Court, in Chapman v. Commissioner, rejected the IRS position that the accrued interest was an additional loan and, thus, a taxable distribution, because the taxpayer never received the interest amounts directly or indirectly from the plan. Therefore, the primary effect of continuing to accrue interest on the defaulted loan is to limit any additional loan the participant may request. For this purpose, the defaulted loan, including all accrued interest, is considered an outstanding loan balance at the time an application for a new loan is made.

If the loan was not a directed investment of the plan, there would be additional fiduciary issues to address."

[Guest Wolves1962]

Thank you that helps quite a bit..

[Guest Wolves1962]

Also the loan was a loan for hardship reasons...

[WDIK]

Wolves1962:

Using the example provided by Noodle as a basis, weren't you asking if the hardship distribution could exceed $10,000?

[Guest Wolves1962]

I was not asking about any amount in particular. I was asking if the participant can have a hardship distribution after a loan for HArdship reasons.

Thansk all

[Guest Wolves1962]

Sorry I put the last post up in a rush, I didn't want to sound ungrateful. I read the 401(k) answer book to read that any hardship distributions were to be subtracted from trh available amount.