Hardship Gray Area

[Guest Dohertmk]

A client of ours recently called us with a very interesting question. A participant rents a place for him and his family. The property is being foreclosed upon and he therefore is being evicted. He can not prevent this eviction as it is out of his control. However, he wants to take a hardship so he can immediately place a security deposit and 1st months rent down on a new place for him and his family. The plan follows safe harbor standards. The participant has the court documents and notice indicating eviction. I personally think that since the hardship can't prevent eviction, it does not qualify. A colleague of mine feels that due to the economic times, the IRS is loosening their standards and would likely allow this with proper documentation.(notice, copy of lease for new place). I'm not sure if this is a risk I(or the client) would like to take---any thoughts? I'd greatly appreciate it!

[J Simmons]

I wouldn't place a plan's qualification in jeopardy on a hope that the IRS is loosening its hardship definitions, not before there's an actual pronouncement anyway.

I would also suggest that the plan documents be reviewed carefully. It sounds as though you have a plan with the safe harbor 'immediate and heavy financial need' categories. Treas Reg § 1.401(k)-1(d)(3)(iii)(B). Plan fiduciaries need to follow the plan as written.

If the plan document incorporates those safe harbor categories and you want to make this hardship, first amend the plan so that it does not use those safe harbor categories. But then be careful in making general definition determinations, and following the precedence set by earlier determinations when making later ones.

All that being said, if you go the general definition route, the situation you describe about the EE needing a security deposit seems like a hardship to me. However, the 1st months rent? I don't think I could go that far.

[BG5150]

All that being said, if you go the general definition route, the situation you describe about the EE needing a security deposit seems like a hardship to me. However, the 1st months rent? I don't think I could go that far.

Most places require you give at least the first month's rent in advance before you can move in; some even require a month and a half, and some ask for first and last months rents.