Hardship Distribution

[CLE401kGuy]

Participant in the plan has provided the bill for funeral expense as evidence of hardship, but along with it, he's provided the check showing that he made the payment to the funeral home. Making the payment has caused hardship - if you have proof showing that the participant paid the expense that qualifies as the hardship reason could you still make hardship distribution - the bill was paid on 6/7/12, and the invoice from the funeral home does show that the participant was behind in the payment for the service as of 4/21/12... Any thoughts?

My original thought - no go on hardship since the hardship reason no longer exists due to being paid off...

[PensionPro]

I agree. A distribution is not considered necessary to satisfy an immediate and heavy financial need of an employee if the employee has other resources available to meet the need.

[Bird]

I could argue, effectively I think, that mere payment of the bill doesn't mean one had resources to pay it...who knows what kind of juggling was involved and will/would cause other bills to be not paid or past due?

But setting that aside, don't we have to know if the plan uses the safe harbor definition or not? I believe that the "other resources" condition only applies for non-safe harbor provisions. if it uses the safe harbor, funeral expenses are ok, period.

[ETA Consulting LLC]

You make a valid point; it always boils down to judgement and documentation. I tend to agree with PensionPro from the straight fact pattern. However, this could be overcome by an employee representation that no other sources of funds were available while those proceeds represent amounts provided in order to proceed with burial until that hardship amount is received. This would, obviously, require detailed documentation (maybe even a certified statement from a friend) stating that those funds were provided to the participant with that understanding. This would provide a much higher standard of documentation as the seemingly obvious answer is that the amounts were paid with funds that were available as evidenced by the check used to pay those funds.

Good Luck!

[BG5150]

Does the plan use the "Safe Harbor" method for determining hardships?

If yes, all you need is a bill from the funeral parlor, and make sure no other distributions or loans were available under all plans of the employer.

That's it. No statement saying there are no other resources needed.

[PensionPro]

There are two discrete questions to consider:

1) Is there an immediate and heavy financial hardship? If the plan uses the safe harbor definition for this determination "a distribution is deemed to be on account of an immediate and heavy financial need of the employee if the distribution is for ... payments for burial or funeral expenses for the employee's deceased parent, spouse, children or dependents." Reading the language of the regs my interpretation is that this distribution is NOT for payment for burial expenses as represented by the OP. The key I believe is the employee needs to furnish a current invoice from the funeral home.

2) Is the hardship distribution necessary to satisfy the need? My interpretation is that there is not an immediate and heavy financial need. However, if one believes otherwise and uses the safe harbor definition for this determination then you only have to make sure the distribution does not exceed the hardship amount and the employee has received other loans/distributions from the plan.

It does not seem the funeral expenses are the hardship. Incurring the funeral expenses has caused other financial hardship. The question is, is this other hardship an immediate and heavy financial need? Of course we would not be discussing any of this if the participant did not attach a check to the application!

[masteff]

It does not seem the funeral expenses are the hardship. Incurring the funeral expenses has caused other financial hardship.

I respectfully but adamantly disagree unless you can show regs, PLRs or case law to support your position. You're saying the effect is more important than the cause.

[PensionPro]

Here is my opinion, and it is okay to disagree:

The invoice is stale (since it has been paid and no longer outstanding) so it can not be the basis for the hardship. If a plan administrator is okay with stale invoices, will they accept an invoice that is 5 or 10 years old simply because it is for a qualifying expense?

As far as the funeral expense causing the other hardship that is a quote from the OP: "Making the payment has caused hardship." I believe the administrator may have leeway if the employee had to borrow funds to pay the funeral expenses and is requesting a distribution to repay that loan. I don't know that is the case because the only facts we have here are what the OP is giving us.

[ETA Consulting LLC]

Here is my opinion, and it is okay to disagree:

The invoice is stale (since it has been paid and no longer outstanding) so it can not be the basis for the hardship. If a plan administrator is okay with stale invoices, will they accept an invoice that is 5 or 10 years old simply because it is for a qualifying expense?

As far as the funeral expense causing the other hardship that is a quote from the OP: "Making the payment has caused hardship." I believe the administrator may have leeway if the employee had to borrow funds to pay the funeral expenses and is requesting a distribution to repay that loan. I don't know that is the case because the only facts we have here are what the OP is giving us.

I agree with what you are saying; which is what you've established in the first comment. You're simply saying that it cannot be a hardship as the funeral expense no longer exists. Remember, the participant paid it off with a check.

Now that he paid it off and is indebted to a friend, a condition created by the payment of funeral expenses, it does not qualify as a hardship.

I respect that interpretation. But my original comment addressed a little of that if documentation was shown that the payment of the funeral expense was made with funds provided to the participant with the understanding that a hardship distribution would be received from the plan.

You're not saying "Hey, funerals aren't safe harbor hardships". You're merely saying that in this case, the funeral is not the hardship, but the fact the participant ran out of money.

Good Luck!

[K2retire]

This is not really much different than a medical bill that was charged to a credit card. That is a frequent enough occurance that I doubt there would be debate about whether the payment to the credit card company qualified as a hardship.

Sadly neither medical providers nor funeral homes are typically willing to wait while a hardship request is processed. It's too bad the people who make these rules don't seem to live in the real world.

[ETA Consulting LLC]

It's too bad the people who make these rules don't seem to live in the real world.

"Like"

I believe there is a little flexibility provided by allowing the Plan to consider "Participant Representations" with respect to the availabilty of other funds. Under this fact pattern, this is futher complicated because the participant actually produced a copy of the check that was used to pay the funeral expenses (meaning that the funeral hardship was satified while the participant has another burden of 'having less money'; which is not a hardship). My contention is still (pushing the envelop a little further) that it would depend on the conditions on which those funds were available. I think we would agree, however, that it would be less of an issue had the participant not presented the sponsor with a copy of the check used to pay the expense. That's like saying, "I want a hardship distribution, but I'm going to prove to you that the funds are NOT needed to satisfy the hardship".

So, we know what we arguments are :-)

Good Luck!

[masteff]

My original thought - no go on hardship since the hardship reason no longer exists due to being paid off...

Don't crisscross "prevent eviction or foreclosure" with the other hardship reasons. I take the position that, to "prevent" eviction or foreclosure, the debt must still be owed. The other hardship reasons do not have such wording to suggest the same immediacy of the debt. (And a debt often doesn't even exist yet on education since we're looking forward 12 months.)

As K2retire says, in discussions about medical expense hardships, this board has reached consensuses about paying medical bills that were paid prior to the application (emergency dental work being a common scenario for payment required prior to service). The consensus has never been "it's been paid so it's no longer a medical hardship". PensionPro has suggested the debt is too old to pay, but we're talking about a 6 week old statement which we have evidence was paid a mere week ago; we're not talking about bills that are "5 or 10 years old". The "how old is too old" question has already been hashed out in the medical hardship threads.

The participant experienced a financial burden when they accepted the debt to the funeral home. That burden is the exact same and continues to exist despite the funeral home having been paid. The participant still has a decrease in net worth which has caused a hardship burden for which they have applied to the plan for relief.

[ETA Consulting LLC]

PenPro's argument was "how can a distribution from the plan be necessary to pay a bill that was already paid by the participant". This is a valid question. We know a hardship existed because it was deemed to exist by simply being a funeral. A separate standard is whether a distribution from the plan is necessary to pay the hardship. PenPro's argument is no, because their is no bill outstanding.

I understand, and respect, that argument. I, like you, believe there are other facts to consider. I do not believe how long ago (or how old the invoice) was it one of those facts. The analysis should remain on the lines of "whether a distribution from the plan is necessary in order to pay the invoice".

From here, we'll never agree. That's where it would depend on the judgement and documentation of the decision to show the IRS, if audited, that the distribution for hardship was valid.

Good Luck!

[BG5150]

The analysis should remain on the lines of "whether a distribution from the plan is necessary in order to pay the invoice".

In a plan that uses the safe harbor basis in determining hardships, the above is not applicable. Whether the invoice is paid or open not withstanding, in a safe harbor situation, I could have a million dollars in cash sitting on my kitchen counter, but I'd still be able to take money out of the plan to pay for funeral expenses.

[ETA Consulting LLC]

The analysis should remain on the lines of "whether a distribution from the plan is necessary in order to pay the invoice".

In a plan that uses the safe harbor basis in determining hardships, the above is not applicable. Whether the invoice is paid or open not withstanding, in a safe harbor situation, I could have a million dollars in cash sitting on my kitchen counter, but I'd still be able to take money out of the plan to pay for funeral expenses.

I disagree. Just because a hardship exists doesn't mean a distribution from the plan is necessary in order to satisfy the hardship. 401(k)(2) of the Code outlines 2 safe harbors 1) whether a harship exists, and 2) whether a distribution from the plan is necessary in order to satisfy the hardship.

Under the 2nd standard, you get the "maximize Plans loans and other distributions" and the six month suspension period.

Good Luck!

[Bird]

I disagree. Just because a hardship exists doesn't mean a distribution from the plan is necessary in order to satisfy the hardship. 401(k)(2) of the Code outlines 2 safe harbors 1) whether a harship exists, and 2) whether a distribution from the plan is necessary in order to satisfy the hardship.

Under the 2nd standard, you get the "maximize Plans loans and other distributions" and the six month suspension period.

I don't think so; I agree with BG. When I first brought up this issue early in the discussion, I read and re-read the rules in our plan document (from the regs) and am quite confident that the point of the safe harbors is to qualify certain expenses without further conditions.

[ETA Consulting LLC]

I disagree. Just because a hardship exists doesn't mean a distribution from the plan is necessary in order to satisfy the hardship. 401(k)(2) of the Code outlines 2 safe harbors 1) whether a harship exists, and 2) whether a distribution from the plan is necessary in order to satisfy the hardship.

Under the 2nd standard, you get the "maximize Plans loans and other distributions" and the six month suspension period.

I don't think so; I agree with BG. When I first brought up this issue early in the discussion, I read and re-read the rules in our plan document (from the regs) and am quite confident that the point of the safe harbors is to qualify certain expenses without further conditions.

These are two distinct criteria outlined in the Regulations. I merely copied two paragraphs illustrating how the two standards are broken down. First, you determine whether or not a hardship exists. If funeral, then yes. Second, you determine if the a distribution is necessary to satisfy the need.

(iii) Immediate and heavy financial need—(A) In general. Whether an employee has an immediate and heavy financial need is to be determined based on all the relevant facts and circumstances. Generally, for example, the need to pay the funeral expenses of a family member would constitute an immediate and heavy financial need. A distribution made to an employee for the purchase of a boat or television would generally not constitute a distribution made on account of an immediate and heavy financial need. A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.

(iv) Distribution necessary to satisfy financial need—(A) Distribution may not exceed amount of need. A distribution is treated as necessary to satisfy an immediate and heavy financial need of an employee only to the extent the amount of the distribution is not in excess of the amount required to satisfy the financial need. For this purpose, the amount required to satisfy the financial need may include any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution.

Keep in mind that the safe harbors are listed below each of these in the Regulations. For these purposes, I only copied the paragraphs to show that there are 2, not 1, standards to satisfy.

Good Luck!

[Below Ground]

For what it is worth (about nothing), I agree with Bird, BG, masteff and K2. Actually, I think K2's point is critical, and is where I would make my stand. The other points are good arguments, but I would say they don't account for intent. Sort of like precedent in case law? That of course is totaly subjective, so here's where opinions will never reach agreement.

[Bird]

(iv) Distribution necessary to satisfy financial need—(A) Distribution may not exceed amount of need. A distribution is treated as necessary to satisfy an immediate and heavy financial need of an employee only to the extent the amount of the distribution is not in excess of the amount required to satisfy the financial need. For this purpose, the amount required to satisfy the financial need may include any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution.

Keep in mind that the safe harbors are listed below each of these in the Regulations. For these purposes, I only copied the paragraphs to show that there are 2, not 1, standards to satisfy.

But if you continue on, you see that a distribution is deemed necessary to satisfy an immediate and heavy financial need if two objective conditions are satisfied:

§ 1.401(k)-1(d)(3)(iv)(E)

(E) Distribution deemed necessary to satisfy immediate and heavy financial need. A distribution is deemed necessary to satisfy an immediate and heavy financial need of an employee if each of the following requirements are satisfied—

§ 1.401(k)-1(d)(3)(iv)(E)(1)

(1) The employee has obtained all other currently available distributions (including distribution of ESOP dividends under section 404(k), but not hardship distributions) and nontaxable (at the time of the loan) loans, under the plan and all other plans maintained by the employer; and

§ 1.401(k)-1(d)(3)(iv)(E)(2)

(2) The employee is prohibited, under the terms of the plan or an otherwise legally enforceable agreement, from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution.

[ETA Consulting LLC]

I see what you are saying. The "No Alternative Means Available" is under the 'facts and circumstances'; while the "deemed necessary" looks at only the employer plans and 6 month suspension