Hardship Distribution Safe Harbor Rule

[CAR]

My client has a 401(k) Corbel Prototype Plan that allows for hardships only under the safe harbor hardship rules. A Plan participant has mold damage from her residence. She is the renter (not owner) of her principal residence. Her residence was flooded last spring and now has a considerable amount of mold, etc. plus her personal possessions were damaged by the flood. She has no renters insurance and neither does the lessor (owner of the residence). The owner of her residence refuses to make any repairs. She sent the Plan trustee pictures of her damage in her residence requesting all of her plan balance to make repairs. My problem with this request is the hardship reason as quoted in the plan document is for "Expenses for the repair of damage to your principal residence that would qualify for the casualty deduction under the Internal Revenue Code." When I read the IRC Section 165 it specifically states that only an owner of the damaged property can claim a casualty deduction. The Plan participant states that the distribution request is to replace the molding drywall, clean the carpets and replace her furniture. She works in a law firm and has given her employer a copy of an IRS 401(k) document that states that the definition of "principal residence" includes a residence that is rented but does not designate that it only applies for the eviction clause. Is she eligible for a hardship distribution to make repairs to the home she rents and to replace her furnishings, or only to replace her furnishings? I am only the TPA, not a plan trustee but they have asked me for a better explanation of whether she is eligible for a distribution to pay for these items and for this hardship "casualty" reason. Does "damage to your principal residence" include replacing her furnishings and making repairs to her rented house?

[D Lewis]

I don't know much about laws, but if this participant works for a law firm, should not it be explored what remedies there are to force the landlord to make the repairs? Aren't they required to do so if it is a health issue? Can't a renter also legitimately break the lease under such circumstance?

Short of going with any of that, if this participant used her regular income and savings to make the repairs, she would need a hardship to prevent eviction since she would not have the money to pay the rent. Might have to get a loan outside of the plan first since the amount to make repairs is most likely more than curent income. Maybe someone else can comment if that is a viable approach.

[Guest Sieve]

Most states consider a renter to be constructively evicted if conditions in the rental unit are such that contuining to live there becomes a safety or health hazard as a result of conditions in the residence. So--although I've never seen it stated as such--I would take the position (at least as to the residence) that there has been an eviction as a result of the safety/health conditions following the flood, and request the hardship distribution for repairing the residence under the eviction safe harbor hardship provision (Treas. Reg. Section 1.401(k)-1(d)(3)(iii)(B)(4)), and for repairing/replacing the furniture under the casualty loss provision (-1(d)(3)(iii)(B)(6)).