Hardship question

[PFranckowiak]

Plan uses Safe Harbor for Hardships.

Plan does not allow for loans.

Participant is building a new home and has a construction loan.

Current home is not selling (surprise - we live in MI)

He now is defaulting on the construction loan and wants a hardship.

Any ideas as to whether this fits under purchase of a principal residence or forclosure ?

Thanks

Pat

[masteff]

The regs say:

(2) Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments);

...

(4) Payments necessary to prevent the eviction of the employee from the employee's principal residence or foreclosure on the mortgage on that residence;

The construction costs might have qualified but you now have specific knowledge that the employee is defaulting on the loan and presumably ceasing construction prior to completion, which means the property in question will not become the employee's principal residence. Same for foreclosure; it never became a principal residence.

It's a tough situation but fails to meet the IRS's very narrow definition of a hardship.

EDIT: now if taking the hardship would prevent defaulting on the construction loan and enable the employee to move into the constructed house, thus making it a principal residence, then it would be good.

[Guest Eric.]

I agree with Masteff, but think the last sentence might be drawing a very fine line.

[masteff]

Guess I should have worded it that if the hardship enables the employee to actually "purchase" (ie complete construction and move into) the home, then it would fulfill that requirement. In this scenario, it's the "purchase" that matters and not the avoidance of the construction loan default.