Hardship distribution for a beneficiary

[Guest Statler]

Has anybody delt with the issue of hardship distributions due to hardship of primary beneficiary? I have read PPA and Notice 2007-7. It says that if a plan permits hardship distributions of elective contributions for safe harbor reasons, the plan can permit distribtuions for a few reasons for hardship of a primary beneficiary. What I am having trouble with is what sources are allowed for the hardship of beneficiary. Is it just elective contributions or all sources allowed by the plan?

Thanks

[K2retire]

Wouldn't it be the same sources available to the participant according to the plan document?

[Guest Sieve]

I would agree with K2--especially since the beneficiary does not obtain the hardship distribution, but the distribution remains a hardship distribution of the partcipant and the beneficiary simply stands in the shoes of the participant's spouse or dependent for purposes of determining whether the participant has a hardship (e.g., for the primary beneficiary's medical, educational or funeral expenses, but not prevention of eviction from the beneficiary's home):

"Section 826 of PPA ’06 directs the Secretary of the Treasury to modify the rules relating to distributions . . . on account of a participant’s hardship or unforeseeable financial emergency to permit . . . plans to treat a participant’s beneficiary under the plan the same as the participant’s spouse or dependent in determining whether the participant has incurred a hardship or unforeseeable financial emergency." (Rev. Notice 2007-7, Section III.)

[GMK]

My evil twin is wondering if there is anything to prevent participants from using this to game the system.

Looking for some extra cash, a participant who has no hardship need designates as primary beneficiary an acquaintance who has a legit hardship need (with the written agreement of participant's spouse, if any). Participant then receives the distribution and changes the primary beneficiary back to the previously designated person. Hmm. Since the scam would not be obvious until after the distribution is made, are there any grounds on which the Plan Administrator could deny the distribution?

Sorry to be so subversive this early in the morning. Just trying to protect the plan from cheaters.

[Guest Sieve]

I absolutely agree with you--that's why it would be nice to have more guidance than a few Q&As in Rev. Notice 2007-7. The hardship has to be for either education, medical expenses, or the funeral of the primary beneficiary, so the participant would have to decide to lie (e.g., by obtaining a valid medical bill or tuition bill from someone, then naming that individual as beneficiary, and then using the hardship $$ for something else) in order to game the system. This new hardship distribution opportunity certainly increases the chance of manufacturing a fib (technical term!)..

It's really no different--the lying, cheating & robbing part, and then renaming the original beneficiary immediatley after the hardship distributin occurs--than another scheme that results in early distributions from 401(k) plans: the participant "separates" from spouse, obtains a QDRO pursuant to the "separation", takes a distribution, and then remarries the former spouse (although I guess there's a risk that the spouses may like their freedom & not remarry!!).

The purpose of the new rule was to permit a hardship distribution for the non-traditional living arrangement--which is why evictions, purchases of a principal residence & capital losses of the primary beneficiary are not covered in Notice 2007-7, since the primary beneficiary is supposed to be living with the participant. But, in my mind, it does open additional avenues for abuse, and is why I suggest that clients not include it in their plan at this time (until an employee presses for it).