Hardship and Medical Expenses

[DP]

A participant in a PS/401k plan has requested a hardship distriution for medical expenses. Upon questioning her, participant stated she has financed her outstanding medical bills. Can she still receive a hardship distribution for the unpaid amount of the medical bills?

[Guest amycavanaugh]

Specific guidance is lacking. Section 1.401(k)-1(d)(3)(i) of the regulations provides that "A distribution is deemed to be on account of an immediate and heavy financial need of the employee if the distribution is for...Expenses for...medical care". The 401(k) hardship regulation refers to "medical care that would be deductible under section 213(d)". The regulations under 213(d) say that a medical expense is deductible for the year in which the expense is actually paid (not when the medical procedure is performed, if different). I think paying the credit card company for the medical care expenses would fall within this requirement.

Section 1.401(k)-1(d)(3)(iii) provides that a hardship distribution must be necessary to satisfy a financial need, and that the determination is based on the relevant facts and circumstances. The employer can rely on the employee’s representation that the need cannot reasonably be relieved by "borrowing from commercial sources on reasonable commercial terms", and the employee is not require to take counterproductive measures.

If the participant represents that a loan is not available on reasonable commercial terms (which could easily be the case with credit cards), or that such a loan would result in another hardship, a hardship distribution would be permissible. The hardship distribution could not exceed the amount of the medical expense; it could not be used to pay the interest charge, if any, on the credit card. With regard to the timing, there is no guidance. However, if the hardship distribution is requested several months after the credit card bill is received, the distribution would be to pay off a credit card balance, rather than to pay a medical expense.

[masteff]

Administering hardships can sometimes be a fine line between too little and too much information. I've had people say too much and talk themselves out of withdrawals. The problem here is the words in the reg: "unless the employer has actual knowledge to the contrary".

To emphasize on a few points from Amy's comments above.... 1) it has to be a "commercial source"; this excludes payments plans offered by the hospital/provider as they're not a 3rd party to the transaction; it also excludes loans from family members. 2) it has to be at "reasonable commercial terms". 3) it can't be counterproductive. Do you have "actual knowledge" that what the participant did fully meets the criteria?

Keep in mind that the regs don't require them to be "unpaid" medical expenses... simply medical expenses. You're generally not trying to verify anything about payments which might be reflected on a statement except to determine if it was from an insurance company. In fact it's customary that payment be rendered at time of service, so some prior payments are expected to be seen.