Used Credit Card to Pay Medical Expense Now Wants a Hardship

[Guest KateSmithVA]

Participant has submitted a credit card bill from a company called, CareCredit. I looked up the company on line and it is a company that offers credit to people for medical reasons. The bill shows a balance of $5,800 and, as with most credit card bills, shows a minimum amount due ($264.00).

We believe the participant is requesting a hardship withdrawal for the total amount due, but it seems to me that she has already paid the medical bill with the credit card.

Can she take a hardship withdrawal to payoff this bill? The plan uses the safe harbor hardship rules.

Thank you.

[masteff]

The participant can make a hardship withdrawal for the amount paid for medical services (so if the credit card includes non-medical items, then exclude them). You don't really care about the status of the payment (other than that services are already rendered and all insurance coverage has been applied). The fact is was paid by credit card is irrelevant; it's sufficient that it's for medical treatment.

If the person has insurance coverage, you'd really prefer a copy of their Explanation of Benefits (EOB) from the ins co which will clearly show how much was covered by insurance and what the patient's responsibility is.

Edit: with further thought, I wouldn't be inclined to accept a balance forward on the statement... I'd rather have documentation of the underlying expenses. Possibly the credit company can give the participant a print out which (hopefully) may have enough detail for you to feel comfortable that actual medical exenses were incurred. Also watch out for double-dipping... such as, if the person previously took a hardship for medical but then used the credit company to pay it and now wants another withdrawall for the same expenses.

[QDROphile]

What about Treas. Reg. section 1.401(k)-1(d)(3)(iv)©(5)? The individual borrowed from a commercial source. Are the terms reasonable?

[masteff]

What about Treas. Reg. section 1.401(k)-1(d)(3)(iv)©(5)? The individual borrowed from a commercial source. Are the terms reasonable?

Moment I read QDRO's post I realized the conversation has been had before.... unfortunately that reg section uses the term "actual knowledge" which the employer does have in this case in the form of the statement... so as QDRO correctly asks, are the terms commercially reasonable? If so then can't allow the hardship.

[J Simmons]

Even if the terms are not commercially reasonable, are not the proceeds of the unreasonable loan yet a resource? I would think 1.401(k)-1(d)(3)(iv)©(5) would relieve the EE of having to apply for an unreasonable loan and yet have an immediate and heavy financial need, but with loan proceeds in hand, that looks to me like an alternate resource that belies immediate and heavy financial need. After all, once the unreasonable loan was made, the proceeds became assets of the EE--and as such an alternate means of relieving the hardship.

[Guest Sieve]

If the plan uses the "deemed" rules for satisfaction of the financial need (Treas. Reg. Section 1.401(k)-1(d)(3)(iv)(D)), then the commercial reasonableness of any loan is immaterial and actual knowledge of the employer/administrator that the medical expense was paid with a loan or credit card or cash is not relevant (since the employer is not relying on an employee representation that there are not other resources available to relieve the need). To me, that moves this analysis entirely into a "reimbursement" discussion (i.e., whether a hardship distribution can be used as a reimbursement for expenses already paid).

I think that this analysis is especially necessary where the regs talk of some hardship distributions being used for "expenses" (purchase of principal residence, medical, and casualty loss) and others being used for "payments" (tuition, eviction/foreclosure, and funeral expenses). To me, if the distribution is being used for "expenses", that means it can be used for reimbursement of payments already made.

Putting those together, I think all you need is a copy of a bill for medical expenses (if using the "deemed satisfaction" rules), even if the bill is marked "paid", in order for a medical hardship to exist--whereas the implication for tuition, for example, is that the hardship distribution cannot be used as a reimbursement (since that distribution must be for "payment" of tuition). [Of course, you can't tell if someone already has paid a bill if the bill itself is being presented as evidence of the need. But, if you actually know that payment has occurred (as here), then you ought only permit a hardship distribution in those circumstances in which reimbursement is permitted.]

All things being equal, why else, other than sloppy drafting, would the safe harbor hardship list use "expenses" some times and "payments" other times? Even the 2 recent simultaneous additions to that list are worded differently.

[J Simmons]

Larry,

They would yet be medical "expenses" then if insurance pays those expenses for the employee. All that would be necessary is that the employee have ever had medical expenses. Is that how you'd see it? If not, then is it the fact that the employee has to pay the loan back (bear the expense) that would differentiate the loan from the insurance situation. So then it would only be a hardship when and as the loan payments come due. That would be when the financial need comes into play.

Could paying premiums for medical insurance be a hardship for which there might be a financial need?

As an exception to the general rule against in-service distributions of 401k benefits before age 59 1/2, I would be very hesitant to give a broadening interpretation rather than a narrow one.

[Guest Sieve]

John --

I did perhaps speak too broadly, but my notion simply was that the expressed need is for medical care expenses actually incurred. You don't have to determine that there is or was, in fact, an immediate and heavy financial need, just that the expenses were incurred for medical care pursuant to the reg.

Reimbursements from insurance would reduce the need, since the need under the regs only includes "medical care that would be deductible under section 213(d) . . .", and insurance reimbursements reduce the available deduction. So, best case scenario is to ask for an explanation of benefits from the insurance carrier (as was suggested in an earlier post). [And my statement that all I need is to see a medical bill is just too simplistic . . . ]

Since "medical care" under IRS Section 213(d) includes health insurance, I guess it would be covered. Although I'd never considered it, there's nothing to suggest otherwise--the reference is not to Section 213(d)(1)(A), but just 213(d).

I'm not trying to give this a broadening reading--I'm pretty conservative when it comes to hardship withdrawals--but just interpreting the language of the reg.

[masteff]

From a practical standpoint (which some of you will take exception to), at the end of the day it's what in the file that matters. If the EE can come back with EOBs to show the amount of medical expense not covered by insurance, then that's what should go in the file as it's the best form of documentation for this type of hardship.