Repeated Hardship Requests / Access to Commercial Credit

[BeanCounterBlues]

In an IRS Q&A there's a reference to hardships not being permitted if the participant has access to a commerical loan (eg take the proceeds and pay the bill).

Facts: employee takes a hardship w/d about two times per year (this has been going on for years). Plan administrator requires hard proof of the hardship (eg does not just take the participant's word for it) eg copy of tuition bill, copy of uninsured medical bill etc. This participant has a child in college and various medical bills as many of us do. Thus hardships reasons have been easy to come by for this particular individual.

Latest request is for an uninsured medical bill for which the participant incurred costs some time ago, and opened a VISA credit card account to pay the bill. Minimum payments approx $150 / monthly payment. Participant claims can no longer afford the monthly payments. Only proof that has been presented thus far is credit card stmts (plan admininistrator is in the process of asking for the actual medical bills).

My guess is that if the participant were to forgo their monthly dishTV subscription they could pay the credit card (apologize for being harsh, am trying to stress a point).

How far does the plan administrator have to go in determining if the participant does or does not have reasonable means to pay the bill? The 401k plan is used as a checking account in this situation.

Had I not been presented w/ the history of the credit card account, I probably wouldn't have asked the question but I am concerned that the "exhausting of commerical credit lines" issue causes a problem here. Also - the participant already paid the medical bill w/ the credit card - so does that mean now that the participant is requesting funds for a credit card bill or is it a request for medical expenses? The only charges on the credit card are from the original medical bill - the card has not been used for any other purpose.

If this hardship were granted would anyone out there be concerned the validity of the distribution would be called into question upon audit? The plan admin is interested in doing the right thing eg is not using the threat of an audit as the basis for making the decision.

Appreciate any opinions, thank you.

[masteff]

The Visa on it's own is definitely unacceptible because it allows monthly payments and is not due in full (and doesn't otherwise meet the hardship safe harbor reasons).

I'm going to send you a personal message so the rest of my response is not documented in the open. I'll just say here that you're not the first one to figure how far into the grey area to let yourself go.

[TPAMan]

From what you have shared it appears that the medical bills were paid in full.

We typically would be very hestitant to extend any Safe Harbor Hardship provision to credit card payments.

[masteff]

I'll just add to my previous comment that if, at the end of the day, you're uncomfortable with it, then don't do it. I know the hardest task is telling someone in financial distress that they're denied, but you can sometimes soften the message by presenting other options (i.e. financially sound ideas like reviewing their budget and cutting other monthly costs).

Oh, and using the IRS as a scapegoat can be helpful when having a denial of withdrawal conversation... "the problem is that the IRS's definition of a hardship is much stricter than what you or I would think of as a financial hardship".

[BeanCounterBlues]

Thanks much - that was basically what I was anticipating (masteff - thank you for your comments!)

[BG5150]

What are the Hardship requirements under the plan? Safe Harbor? Facts & Circumstances?

Under Safe Harbor, they are pretty clear.

Under F & C, I seem to have read that the participant must exhaust all available funding including any brokerage accounts or other liquid assets.

From 1.104(k)-1(d)(3)(iv)B

A distribution is not treated as necessary to satisfy an immediate and heavy financial need of an employee to the extent the need may be relieved from other resources that are reasonably available to the employee. This determination generally is to be made on the basis of all the relevant facts and circumstances. For purposes of this paragraph (d)(3)(iv), the employee’s resources are deemed to include those assets of the employee’s spouse and minor children that are reasonably available to the employee. Thus, for example, a vacation home owned by the employee and the employee’s spouse, whether as community property, joint tenants, tenants by the entirety, or tenants in common, generally will be deemed a resource of the employee. However, property held for the employee’s child under an irrevocable trust or under the Uniform Gifts to Minors Act (or comparable State law) is not treated as a resource of the Employee.

However, the ER can rely on a written statement that

that the need cannot reasonably be relieved—

(1) Through reimbursement or compensation by insurance or otherwise;

(2) By liquidation of the employee’s assets;

(3) By cessation of elective contributions or employee contributions under the plan;

(4) By other currently available distributions (including distribution of ESOP dividends under section 404(k)) and nontaxable (at the time of the loan) loans, under plans maintained by the employer or by any other employer; or

(5) By borrowing from commercial sources on reasonable commercial terms in an amount sufficient to satisfy the need.

(Same code section, but C instead of B)

[BeanCounterBlues]

It's your standard safe harbor. My difficulty is that the language (to me anyway) is somewhat ambiguous as to exactly how far the plan admin has to reach to make these determinations. How far must the plan admin go to determine if other resources are available.

I think in this particular case it's more clear cut because the participant presented me w/ a credit card stmt - proceeds of cash advance to pay medical procedure. EG the partic clearly demonstated alternative financial resources, hardship impermissible (even though partic is trying to assert they can't afford to pay the credit card).

In general though - had the partic not come forth w/ the credit line info - the plan admin likely wouldn't have questioned the request. They would have reviewed the medical bill, determined that the Company's health plan of which the 401k participant is a participant in as well, wasn't covering the cost.

Until the banking crisis - virtually anyone could get more credit than they could afford. Post bank crisis I personally still am offered and "advance approved for" (and I decline) far more credit than I can afford. Is the plan admin supposed to delve into all of that? Perhaps those are rhetorical questions

[K2retire]

If the medical bill was already paid by a credit card, it's pretty clear that it is no longer a hardship.

If this participant has been doing this multiple times a year for several years (each time requiring a suspension from making new deferrals) how does he or she have any money left from which to take additional hardship withdrawals?

[BeanCounterBlues]

The plan permits hardships from other sources. It is a generous employer contribution plan on top of the 401k. Thanks for everyone's comments.