Hardship Options

[Guest andmik]

Hello:

Hoping someone can confirm either way.

Participant requested and was granted a hardship withdrawal for the purchase of a primary residence. After the approval (and the check cashed) the participant's mortgage was denied and thus the purchase is not occurring.

I do not believe that the participant has an option to re-deposit the hardship amount back into the Plan but just want to make sure that there is not a strong view on the other side.

I think the only thing the participant can do at this point is retain the money with the prospect of needing the funds to purchase a primary residence in the future if they are savvy enough to do that.

There is not an opportunity to put it back in the plan, nor is it eligible for rollover to an IRA either.

Thanks for any insight anyone might be able to offer.

Sincerely,

andmik

[QDROphile]

There are other discussions of this phenomenon on the Boards. There are theories that support return of the funds; some theories denpend on specific circumstances. There are suggestions about more savvy ways to avoid the problem from recurring. Savvy is a good quality in plan administration just as it is for participants. One way to make the uncertainty of closing less problematic is to deliver the funds to the escrow agent, with appropriate instructions. If the cloaing fails, it is much more comfortable for the plan to take funds back and take the position that funds were not distributed.

[Guest andmik]

There are other discussions of this phenomenon on the Boards. There are theories that support return of the funds; some theories denpend on specific circumstances. There are suggestions about more savvy ways to avoid the problem from recurring. Savvy is a good quality in plan administration just as it is for participants. One way to make the uncertainty of closing less problematic is to deliver the funds to the escrow agent, with appropriate instructions. If the cloaing fails, it is much more comfortable for the plan to take funds back and take the position that funds were not distributed.

QDROPhile - Thanks for the interesting perspective. I suppose if the check was not cashed then the PA would have a stronger argument to put the amount back in, but I am not sure administrator's of large K Plans will be willing to take that extra step for primary residence purchases, but great concept for them to consider.

Sincerely,

andmik

[Guest jims]

If you conclude the money can not be returned to the plan, the participant could use the money to fund a Roth IRA or traditional IRA.

[masteff]

You should look in EPCRS. I don't know it well enough but might be a mechanism in there to let you return the funds to the plan.

[GMK]

the participant could use the money to fund a Roth IRA or traditional IRA.

... or a new car or a boat or ...

While the participant in the OP was certainly not trying to game the system, the Plan Administrator might want to review plan procedures a bit to avoid future pay-outs of distributions that end up being outside the set of distributions allowed by the Plan (unless, of course, the Participant was eligible for the distribution without the hardship).

Maybe confirm the approval of the hardship promptly, but delay the payment subject to confirmation of a closing date, loan approval, or the like.

In this case, if I were the PA, I'd try to find a way to get the funds back in the plan.