Hardship for purchase of principal residence

[Gudgergirl]

Participants owns home but wants to sell it to buy another. The new home will be her principal residence. Participant wants a hardship distribution for the down payment on the new home.

The plan only allows hardship distributions for safe harbor reasons.

Any reason this couldn't qualify?

[Guest Sieve]

If first house isn't yet sold, or isn't at least under contract, not sure if I'd approve as hardship. But, then, I'm crotchety when it comes to meeting SH hardship guidelines.

[masteff]

And I'm the other end of the spectrum on hardship approvals... It would be onerous for the Service to only honor hardships if the current residence were required to be disposed of prior to a new residence being purchased (and contrary to common practice in home sales). So as long as the purchased home becomes the principal residence, then the other home doesn't matter.

Sieve - what about people who keep their original house as a rental property? would you deny them a hardship or make them substantiate the rental first?

[Guest Sieve]

I do not want to authorize a "primary residence" hardship distribution if the hardship is for a second residence. As I suggested, the first home would not have to be disposed of--just under contract for sale, thus giving me some comfort that the hardship distribution is for a home which will be used as a primary residence. (In this economy, buying before selling is a big risk--&, I'd suggest that most people, even in good economies, sell before buying.) Otherwise, do I give the hardship distribution simply based on the say-so of the participant that this 2nd home will become a primary residence at some point?--How is that due diligence? If 1st house is not under contract, the participant should have to borrow, & then pay back when the 1st house is sold.

As for conversion to rental, I'd require a rental agreement on the old home before a hardship distribution to buy a new home. Hardship distributions are not intended as a way to start a for-profit business.

[J Simmons]

I take the crotchety approach that Sieve does. It's only the Plan's qualification that hangs in the balance of being wrong about when a hardship has occurred.

The general rule is against in service distributions. The public policy is to make sure that the assets are available in retirement, not consumed before. Exceptions to that public policy rule should be interpreted narrowly.

In addition to what sale has/has not taken place and contracts may or may not be in place, I think it would also be relevant to know where the EE resides at the time that the application for hardship withdrawal is made.