Increase the Need Rule / Hardship Distributions

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Treasury Regulation 1.401(k)-1(d)(3)(iv)(D) of the Final 401(k) Regulations generally states that participants need not take a participant loan prior to taking a hardship withdrawal if by taking the participant loan, it would increase the amount of the participant's financial need.

Since the IRS only gives 1 example in the regulations (regarding purchase of principal residence and bank financing), how narrowly or broadly do you think this should this be interpreted? What do you think the IRS' intention is regarding this exception?

Narrowly -

Few

participants will qualify for this exception and therefore, most participants will need to take a participant loan prior to taking a hardship withdrawal.

Broadly -

Most

participants will qualify for this exception (because the act of taking a loan decreases an employee's net pay), and therefore, most participants can bypass participant loans and go straight to a hardship withdrawal.

Further, what documentation should a participant provide that substantiates that taking a participant loan would "increase their financial need?" Any help is greatly appreciated.

[namealreadyinuse]

Narrowly, as we do with all other 401(k) distribution limitations.

The lending / PR purchase example is the only one I can think of and I would just want something from the mortgage company that additional loans could affect interest rate/creditworthyness.