Hardship for a home, but falls through

[austin3515]

Participant takes a hardship for a home purchase, but the deal falls through. Can the money be re-contribyted? I think not, but in this case it's a decent chunk of change.

[GMK]

Here's a similar previous thread:

http://benefitslink.com/boards/index.php?showtopic=33981

with QDROphile's suggestion using an escow account with instructions per:

http://benefitslink.com/boards/index.php?showtopic=40061

[QDROphile]

Procedures need to be reformed so the withdrawal is deliverd to escrow. If the sale fails, the escrow agent returns the funds to the plan. Maybe not perfect, but solidly defensible.

[Kevin C]

If it turns out the participant wasn't really eligible for a hardship distribution, you should be able to correct under the EPCRS rules for overpayments. Part of the correction would be revising procedures to try to make sure it doesn't happen again.

[masteff]

I also think it can be done under EPCRS

http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf

• Hardship distributions are made to participants that don’t meet the plan document’s hardship requirements or §401(k).

o Correction may involve a repayment to the plan of the amounts that did not meet the plan’s hardship requirements or §401(k).

It's a bit awkward because the distribution was legit when made and only became non-qualified after subsequent events.

One issue will be withholding, but if you're in the same tax year, you can probably fix that easily enough too.