Hardship to pay federal taxes?

[Lori H]

The plan document does not technically state this is a reason for a hardship, but.....Here's the sob story: Participant has two mortgages, they(husband and wife) were on short term disability last year, they are trying to sell their house in alabama, but it has not sold. They do not have other assets to sell and they do not want to take out a loan and get further in debt. They owe $9000 in fed taxes.

The SPD does say that the amount of your need may include any amounts necessary to pay any federal, state or local income taxes or penalties REASONABLY ANTICIPATED TO RESULT FROM THE DISTRIBUTION, being the operative words.

It would seem like if the government is due money, they could get it from a retirement plan.

[Guest Jennyb473]

the phrase "the amount of your need may include any amounts necessary to pay any federal, state or local income taxes or penalties REASONABLY ANTICIPATED TO RESULT FROM THE DISTRIBUTION" implies that a participant can gross up their hardship withdrawal so they receive the amount needed to cover their hardship amount. So if they need $2000 for prevention of forclosure on primary residence they can gross that up to $2500 so that $500 can we withheld for taxes and they still receive the $2000 needed for their hardship. It does not imply they can take a hardship for the sole purpose of paying taxes

[QDROphile]

Those words are typically understood to refer to the taxes on the income that results from the hardship distribution based on the hardship standards of the document, such as medical expenses, etc. For example, if a participant qualified for a hardship distribution for $10,000 of medical expenses and was in a 20% tax bracket, the plan could distribute $10,000 (medical expenses) plus $2000 (20% for taxes) plus $1000 (10% penalty tax). My numbers are not fine-tuned for iterative computations. The language does not mean the plan will allow a hardship distribution for a stand alone income tax obligation. A hardship distribution for a stand alone income tax obligation would have to be justified by some other plan terms.

[Guest Sieve]

401(k) Plan hardship distributions do not have to be limited to the safe harbor hardship reasons (medical expenses, educational expenses, principal residence purchase etc.). A plan can assign the administrator (employer, usually) the task of determining whether a hardship exists by looking at all the facts and circumstances of the individual participant. I would check the SPD/Plan carefully to see whether the SH hardships are the only ones available--if not, then this probably is a hardship. If necessary, perhaps the employer can be convionced to amend the Plan's hardship distribution rules to permit generic hardship distributions.

[Lori H]

i understand that a hardship can be grossed up to include any taxes necessary due to the hardship. However, Sieve, this is a standardized Corbel document and does not have a generic hardship provision. Nor do the Safe Harbor hardship rules apply. I bet the plan sponsor goes ahead with the hardship distribution. Should be interesting.

[Guest Sieve]

Lori --

If it doesn't have SH hardship provisions, and it doesn't have the facts & circumstances generic hardship provisions, then what does it have?

[Lori H]

sieve, well when you say generic, if you are referring to medical expenses, purchase of prinicipal residence, tuition, funeral and eviction prevention, then yes it has the generic provisions.

[Guest Sieve]

By generic I mean non-SH hardship provisions (which will permit hardship distributions based on facts & circumstances)--i.e., allows hardship distributions for reasons in addition to the SH hardship reasons, based on f&c.

So, if the plan document just contains SH hardship provisions, you could amend the plan into a "facts & circusmtances" hardship mode and then permit a hardship distibution for the situation described in the OP (if the administrator determines it is a hardship).

[QDROphile]

Don't forget the objective criteria, and when you figure out what that is, please let the rest of us know.

[Guest Sieve]

Don't think I want to get into that discussion again. That would be for Lori's client to decide.

Can't you can just use the Justice Stewart test: "I know it when I see it."

[J Simmons]

Don't think I want to get into that discussion again. That would be for Lori's client to decide.

Can't you can just use the Justice Stewart test: "I know it when I see it."

I think that's one only the IRS can get away with on tax issues.