Hardship Withdrawals Directly to Bank?

[Guest jig_1975]

Can a plan be amended to provide that Hardship Withdrawals that are obtained to prevent foreclosure on a principal residence be submitted directly to the Bank or mortgage holder? We've had some employees present the proper evidence of an impending foreclosure and then not forward the distribution to the bank.

It seems like we're trying to help people that won't help themselves. The client was reluctant to have hardhsip withdrawals at all. In fact they are limited to prevention of forfeiture of a principal residence.

Any and all help would be appreciated. Thanks.

[K2retire]

ERISA prohibits assigning benefits from a plan.

Why not just eliminate the hardship provision if it's creating problems?

[QDROphile]

You can do it, but it is sensitive and the plan needs to turn some square corners because of the anti-assignment rules.

[masteff]

Question to the board at large: is removal or restrictive modification of a hardship reason subject to anti-cutback?

We've had some employees present the proper evidence of an impending foreclosure and then not forward the distribution to the bank.

So I'm a bit curious as to the concern over this. Having administred 4 plans w/ 1000s of participants, this is more common than we would all like for it to be.

The client should review two factors:

1) why do they feel the need to be paternalistic and govern the transaction so closely it can only be used for what the plan sponsor explicitly allowed it for? It's a savings plan, not a spendthrift trust.

2) if you remove the ability to get money in a hardship, how many people will stop putting money into the plan? after all, the main inducement to locking money into a 401(k) is that it can be gotten back out in a limited number of contingencies. same for offering plan loans, main reason to offer them is to overcome the initial fear of losing access to that money.

That's not to say you be a party to fraud, but the person had a legitimate reason under the plan and once the money's outside the plan, it's between the participant and IRS.

[BG5150]

Playing devil's advocate:

Maybe during the time the check is in transit, they come up with the money somewhere else, and they use the hardship money to repay that source.

And, I think the rules only call for proof of the need, not the satisfaction of the debt.

[QDROphile]

The fiduciary can do what the fiduciary decides is comfortable. This fiduciary has had experiences that suggest that greater precaution is warranted. A fiduciary should take into account experience in making judgments, but I am not arguing that the fiduciary is required to arrange direct payment. What do you do about purchase of residence? It is better to pay the escrow agent. If the deal does not close, the fiduciary has no questions about receipt of the refund. It is about good plan administration, not paternalism.

[david rigby]

Question to the board at large: is removal or restrictive modification of a hardship reason subject to anti-cutback?

Permitted. See IRS Reg. 1.411(d)-(4), Q&A2(b)(2)(x).

[jpod]

You can have a hardship withdrawal provision in the plan document that says a hardship is permitted only if the participant elects to have the check (less withholdings) made payable to the lender, and further only if the lender provides the acknowledgment required by paragraph (e)(2) of the Section 401(a)(13) regs. This type of voluntary assignment must be revocable by the participant, but if the participant revokes before the check is sent, then there will be no hardship withdrawal. I realize that this is extremely cumbersome for the plan sponsor and recordkeeper/trustee, but that's the only way it can be done.