Hardship Distribution - repayment of loan

[Guest Sieve]

Is it a valid hardship distribution if the request is to repay a loan taken out to help with the payment of tuition? What if the request is to repay a loan taken for medical expenses? (masteff?)

[ETA Consulting LLC]

I think the fact that a loan was actually used to pay the expense implies that the hardship was satisfied with funding from an outside source. Remember, there are two standards; 1) if there is a hardship and 2) if a distribution from the plan is necessary in order to satisfy the hardship. You can debate item 1 by arguing whether repaying a loan used to pay safe harbor event is the same as paying the safe harbor event, but you would appear to automatically fail item 2.

Good Luck!

[QDROphile]

I concur, but I can imagine circumstances for an excpetion.

[masteff]

Is it a valid hardship distribution if the request is to repay a loan taken out to help with the payment of tuition? What if the request is to repay a loan taken for medical expenses? (masteff?)

I've noted before on medical that some providers require payment in full at time of service... well, if you need urgent treatment, you don't have time to request a hardship so you do what you have to and then go back to the plan to get the hardship (w/in a timely manner). And when the plan processes the hardship, it's based on the medical expense itself.

For tuition it's trickier because that element of urgency is usually missing from taking the other funding. The subjective part might come in based on the type of loan. If it's a standard student loan, then I'd say no and stop there. I might grant minor leeway if the loan covers a period in which the student is currently attending (thinking especially of post-secondary trade programs that typically have you complete a loan app along w/ lots of other papers during the enrollment process), but I don't have anything valid to hang my hat on there other than the service hasn't been fully delivered so the loan, for lack of a better word, is transitional.

Is there anything about the loan that clearly indicates it was short term in nature and taken as a stop-gap until they could get other funding (ie, the term is a year or less, it's from a family member and they can produce a document showing they agreed it was short term, etc)? Because as ETK notes, you have actual knowledge of other resources (reg (d)(3)(iv)©) so you need to show reason to disregard/exclude those resources. (Going briefly back to medical, in thinking about it, the urgency of the treatment is akin a state of duress.)

My next question to the participant is whether the student is still attending because the reg allows for hardship "for up to the next 12 months"... so while you might not be able to go backwards, you can help going forwards.

Edit: glanced back at the reg and the relevant line is: "By borrowing from commercial sources on reasonable commercial terms in an amount sufficient to satisfy the need." You have three elements there you can try to attack: 1) commercial source, 2) reasonable commercial terms, and 3) sufficient to satisfy the need.