Hardship - Documentation

[Guest EricWings]

I have a hardship for a participant that is requesting under the safe harbor option of casuality damage to his principal residence. He has provided us with his 2007 Federal Income Tax form showing that he deducted the loss. I'm thinking that we should require some additional info before we make this distribution. My thought would be estimates for the repair or bills. Any suggestions would be appreciated.

[J Simmons]

I would ask for the actual bill (with description of the types of repairs made) and proof of payment. Casualty loss on a tax return is not necessarily the same as a hardship under the plan in question and the regs.

In a prior life when I was a benefits manager for a medium sized company, one employee received a hardship payout for casualty repairs to his primary residence. The next year, he brought the same bill from the contractor in, with the date whited out and updated, wanting to tap his benefits again. He must have thought we were brain dead--he didn't get the second hardship withdrawal.

[masteff]

The reg reads: "Expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under section 165 (determined without regard to whether the loss exceeds 10% of adjusted gross income)."

The key is that it's expenses for the repair. It's not for the damage. The tax return is useful as evidence that the damage qualifies (as the participant filed it on the return, you don't have to waste time trying to determine if he could; you just have to make sure the repairs relate to that damage). Now you need documentation of the cost of the repairs. (And to prevent J Simmon's excellent point about preventing double-dipping; he's not kidding that people will try to give you duplicate documentation w/ white-out on it.)

P.S. - Form 4684 (Casualties and Thefts) should show how much insurance covered. Be sure to offset the repair bills by the insurance amount.