Return of Hardship Distribution

[Guest msprice]

I have a participant who took a hardship for the purpose of buying a home. The deal fell through and he would like to return the money to the plan.

I have not found any documentation allowing this. Taxes were withheld from the distribution which would further add to this issue.

My recommendation is to suggest that the participant put the money into an IRA (since it has not been more than 60 days) to avoid the tax consequences on the distribution.

Does anyone have any suggestions?

[saabraa]

Hardship distributions are ineligible for rollover.

[SMB]

Just a thought - increase his salary deferrals (assuming this was a 401(k) Plan) to "offset" the taxable income (but not until after the hardship "suspension" period).

[JanetM]

Does the plan allow for after tax contributions? Participant still out the tax withheld but the money could go back into the plan.

[QDROphile]

It would be nice if plan administrators would catch on to the idea of delivering funds in escrow so failure to close does not create the problem in the first place.

[stephen]

What happens if the participant does not cash the hardship distribution check?

[Guest msprice]

What happens if the participant does not cash the hardship distribution check?

Unfortunately, it has.

[Guest msprice]

It would be nice if plan administrators would catch on to the idea of delivering funds in escrow so failure to close does not create the problem in the first place.

I agree.

[Guest msprice]

Does the plan allow for after tax contributions? Participant still out the tax withheld but the money could go back into the plan.

The plan does not allow for after tax contributions.

[Belgarath]

Qdrophile - I'd like to explore your idea of having such funds delivered to escrow to avoid these problems. This is, to me at least, an innovative concept, and I've never seen anything on this subject. But I like the idea as long as it works!

How exactly would this work? If the closing doesn't take place, is there any specific IRS guidance or bulletproof legal principle that would avoid this having to be reported as a distribution, and allowing it to "revert" to the plan? To my non-legal mind, it would seem that it is nevertheless distributed from the plan, even though still held in "trust" for lack of a better term. Please excuse my probably inaccurate terminology, as I'm not familiar with the ins and outs of escrow funds/accounts.

Thanks!

[QDROphile]

The escrow puts the plan in a better position to maintain that the funds were not delivered because the condition failed, and therefore there was no distribution. Certainly there is no delivery to the participant. This is based on general legal principles rather some specific authority under section 401.