hardship with loan balance

[JKW]

I have received conflicting advice on available amounts for hardship after a loan.

A participant has an account balance of $22,000, this includes a loan balance of 10,000, so actually account value is 12,000. Therefore after deducting the loan balance and covering the 50% this would leave the client with $2,000.

So is the participant eligible for a hardship of 2,000 or are they eligible for 12,000?

Thanks.

[masteff]

I suspect you're mixing the loan rules into the hardship rules. You only use the loan rule (and the 50% of balance restriction) AT THE TIME THE LOAN IS TAKEN, not for determining a subsequent hardship.

1) Do not include the loan in the amount that can be withdrawn. Hopefully your plan defines the source heirarchy and it was applied correctly at the time of the loan.

2) What does your plan define as the money that can be withdrawn for hardship? Is it only employee deferrals (ie, no company money can be withdrawn)? If so then the most that can be withdrawn is based on the balance in the employee deferrals account. For example, if the employee has $7000 in deferrals, then despite having a balance of $12000 (not including the loan) then the hardship can only be $7000.

[JKW]

The plan only has employee deferral source in the plan. It is just that based on this situation since she can take out all her 12,000 in deferral this will leave her with only a loan balance out and no other money in her account. I thought a loan was supposed to be secured by 50% of a balance, but your saying thats only at the time of initial loan deposit, right?

[ACox]

masteff is correct, that the 50% of account balance is only used at the time that the loan is granted.

Provided that the participant in this scenario does not have any earnings in their deferral account, they would be eligible to take out the $12k balance provided they can support the financial hardship requirements for the full $12K amount requested.

[JKW]

Thanks for the clarification

[gregburst]

masteff is correct, that the 50% of account balance is only used at the time that the loan is granted.

Provided that the participant in this scenario does not have any earnings in their deferral account, they would be eligible to take out the $12k balance provided they can support the financial hardship requirements for the full $12K amount requested.

If the plan allows for multiple loans and/or replacement loans, must the first $1,000 received be in the form of a loan rather than hardship?

[Guest metzger]

As a follow up to this question...the left over loan balances are not distributed with the participant hardship distribution, correct? I have looked all over and haven't found anything that specifically relates to this. I have a participant who is buying a house, has outstanding plan loan balances of $23k, and is eligible for $24k in hardship withdrawals. If he takes his full available hardship, do the loans get defaulted?

From what I understand the 50% collateral is only required at the time of the loan withdrawal and the participant can keep paying on their outstanding loans after the hardship. But I haven't seen it spelled out that way specifically yet...even through searching here, DOL, IRS and multiple other sites.

Any clarification would be appreciated.

[masteff]

From what I understand the 50% collateral is only required at the time of the loan withdrawal and the participant can keep paying on their outstanding loans after the hardship.

This statement is correct. Do not default unless the employee stops making payments on the loan.