undetermined amount needed for hardship

[Santo Gold]

A participant is requesting a hardship withdrawal to purchase her principal residence. However, because she is purchasing the house via an auction, she does not know the amount needed. Also, if she does not "win" the auction, she would want to put the money back into the plan.

#1 - Can a hardship be taken without knowing the specific amount of the hardship, as is this case?

#2 - i'm guessing the answer is "No", but can she put the money back into the plan if the reason for the hardship goes away (i.e., she doesn't get the house)?

Thanks

[QDROphile]

Issue #1, uncertain amount: Are you suggesting that the full purchase price of the house would be covered by the distribution from the plan?

Issue #2, possible failure: All house sales have the possibility of failure of closing, so the issue is not unique to the auction. Consider whether or not escrow solves the problem. Also ask yourself if the escrow agent needs to be bonded.

[JanetM]

Treasury reg 1.401(k)-1(d)(3)(i) says distribution can not exceed the needed amount. Can't exceed contributions and grand fathered amounts.

I would say this does not qualify since the participant can't be precise as to the amount.

[Santo Gold]

Issue #1, uncertain amount: Are you suggesting that the full purchase price of the house would be covered by the distribution from the plan?

Issue #2, possible failure: All house sales have the possibility of failure of closing, so the issue is not unique to the auction. Consider whether or not escrow solves the problem. Also ask yourself if the escrow agent needs to be bonded.

#1 - I do not know the price of the house but I suspect the downpayment is what is needed; the auction will determine that. So, the request for hardship will likely be for a maximum amount allowable.

#2 - Assuming that amount is more than is needed, could we then put the excess hardship money back into the plan? Once money comes out, it can't go back into the plan, other than a mistake of fact, correct? I do not understand how escrow would solve this.

[QDROphile]

#1: If the purchase price of the house is greater than the maximum hardship amount, you have eliminated the uncertainty. If the designated hardship amount is more than is necessary for the minimum down payment, then the down payment will be more than the minium to use up all of the hardship amount.

#2: You still have the uncertainty about closing, an all-or-nothing proposition. That is a risk of any house purchase, whether or not plan funds are used for the purchase. It might be well for you to explore whether escrow is a technique that should be used generally by the plan. What would you do with a "normal" house purchase that fell through? Same issue.

[RCK]

What are your documentation requirements for purchase of a primary residence?

We require a signed purchase agreement that shows a cash requirement at least as big as the hardship dollar request. You don't have a purchse agreement, you don't get a hardship. So if you are trying to buy the house via auction, you're not going to have a purchase agreement, and therefore no hardship.

On the other hand, we also do not track what you do with the money. Deal fails to close--not our problem--put in the bank until things get sorted out. Your rich uncle dies and leaves you plenty--not an issue.

[wsp]

If your client wants to help the employee he can set up an account or use the plan's checking account to hold the assets until the gavel falls or the money is required in escrow. That way the money never leaves the plan if the purchase falls through and if the amount is greater then the need they haven't distributed the excess. Additionally, the money is liquid should it be needed sooner than expected. Of course this sets a precedence for all employees but for a small plan it works well. I have a client that wanted to do exactly that...one thing that we required was that the participant sign a transfer request to move the money from the investments to the checking account and the account was interest bearing. On closing day, client wrote a check to escrow and handed it to participant as he headed out door to sign papers.