Return of Hardship Distribution

[Guest jjren]

I read an old post with this topic and I have a similar situation. Participant took a hardship withdrawal for purchase of primary residence and deal fell through. In my case, however, the participant did not cash the check, and has returned it. Withholding was taken out. Can this money be returned to the plan? If yes, will the participant need to put in an amount equal to the withholding for that to happen?

[Below Ground]

It sounds like there was no distribution. If the check was not cashed then I suggest that the person never "took possession" of the money. I don't believe that just because a check was written, the distribution was made. Could there be some arcane rule that says I'm wrong? I suppose that's possible. However, I know of no rule that says ripping up the check throws the plan out of compliance.

What about the withholding? That's the tricky part. I suppose you could request return of those monies from the IRS. Ultimately, the person will "get those monies back" when filing the 1040; especially if the transaction is "reversed". That would require the person to pay the plan a sum equal to the withholding.

I think you should also look at this from the "other side". Since the person did not have a hardship, could the person legitimately keep the money. You may need to ask if the distribution is even permissable, especially if under age 59 1/2 and the payout included deferrals.

[Appleby]

It sounds like there was no distribution. If the check was not cashed then I suggest that the person never "took possession" of the money. I don't believe that just because a check was written, the distribution was made. Could there be some arcane rule that says I'm wrong? I suppose that's possible. However, I know of no rule that says ripping up the check throws the plan out of compliance.

What about the withholding? That's the tricky part. I suppose you could request return of those monies from the IRS. Ultimately, the person will "get those monies back" when filing the 1040; especially if the transaction is "reversed". That would require the person to pay the plan a sum equal to the withholding.

I think you should also look at this from the "other side". Since the person did not have a hardship, could the person legitimately keep the money. You may need to ask if the distribution is even permissable, especially if under age 59 1/2 and the payout included deferrals.

I could be wrong, but I don’t think it can be returned to the plan. Even though the check was not cashed, don’t you have constructive receipt occurring?

[J2D2]

I could be wrong, but I don’t think it can be returned to the plan. Even though the check was not cashed, don’t you have constructive receipt occurring?

I'd say you have actual, not constructive, receipt.

[JanetM]

Now the plan has qualification problems if they don't undo the withdrawal. They have made distribution that is not allowed.

[Guest jjren]

Thanks everyone. My gut reaction was that we couldn't allow it back in. I looked at a couple of constructive receipt rulings and cases and think this position is supported. I guess the participant is stuck with the taxation of the distribution whether or not they buy the house.

I also don't think it is a problem for the plan that the hardship reason no longer exists. At the point the hardship was approved and the distribution was made, the criterea for the hardship were met. Anyone disagree?

[Guest Sieve]

It's late in the game, but I would disagree. In the first place, it turns out that the distribution was NOT a hardship distribution because there was no house purchase--therefore the distribution could not be for costs directly related to the purchase of the home (as required by the regs), and it is a distribution which would disqualify the plan (unless the participant is age 59-1/2+ and the plan allows for an in-service distribution). Secondly, this is no more constructive receipt than is a payroll check (or a distribution check) with an extra 0 at the end--it was a payment which, it turned out, was made in error, and the participant was not entitled to the amount of the check because it had NOT been earned (all events had not occurred that caused the participant to be entitled to the $$). All sorts of payments are made to people in error, and that does not mean that the payments are to be included in the recipient's income under some kind of constructive (or actual) receipt theory.

[Kimberly S]

If there was no hardship, which seems to be the case after the deal fell through, I believe the participant is REQUIRED to repay the distribution. That requirement likely includes the entire distribution including withholdings.