Personal residence hardship

[shERPA]

A participant wants a hardship to purchase what will be her primary residence. However apparently her uncle is actually buying the home and will be the title holder, the participant will not appear on the title at all. She apparently needs to kick in this hardship distribution for the purchase however.

Is this permissible? 1.401(k)-1(d)(3)(iii)(B)(2) says "Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments);

One could certainly infer from the reg that it means the employee is the actual purchaser of the home, but it does not say that, it just says it must be a principal residence "for" the employee.

Thanks.

[Belgarath]

IMHO this situation as you describe would not qualify for hardship distribution treatment. I think it wouldbe a very aggressive (unjustified) reading of the regulation to allow a hardship for the purchase of a principal residence that will not even have any joint ownership on the part of the participant.

[jpod]

Where do you see anything in the regulation saying the participant must be the OWNER of her principal residence? Sure, we can infer that this is what the drafters of the regulation had in mind, but they didn't say that. I think substantiation would be a tougher issue, however. Probably need a letter from uncle confirming that participant will live there and as a condition she must contribute $X towards purchase price. I don't think you or the Plan should care whether it is a gift, advance rent, or whatever for tax purposes.

[QDROphile]

Why should the plan admnistrator undertake any risk in this matter by departing from conventional interpretations and arrangements?

[R. Butler]

I agree with QDROphile. Just from the limited facts it looks as much like a depsoit and a rental agreement as it does a purchase.

[masteff]

Where do you see anything in the regulation saying the participant must be the OWNER of her principal residence? Sure, we can infer that this is what the drafters of the regulation had in mind, but they didn't say that. I think substantiation would be a tougher issue, however. Probably need a letter from uncle confirming that participant will live there and as a condition she must contribute $X towards purchase price. I don't think you or the Plan should care whether it is a gift, advance rent, or whatever for tax purposes.

I'm w/ jpod but could also support a more conservative stance. I would change "probably need a letter" to "must get a letter".

[shERPA]

I'm thinking this coule work if there is a contract between the participant and her uncle that says something to the effect that in consideration of $x given to uncle for the purchase of the property, uncle agrees to let participant live there. They may even have an arrangement where she buys it over time. It would have to differentiate from ongoing rent so as not to appear as some sort of prepaid rent. The reg doesn't say the participant must own the property and I am reluctant to create requirements beyond those that the IRS imposes.

[jpod]

QDRO: Suppose the plan is pulled for audit. The agent identifies this (somehow) and even though there is a letter from the uncle as I described the agent says the withdrawal doesn't qualify under the regulations. Suppose further that quality substantiation is provided showing that the home was in fact used as the participant's principal residence (e.g., utility bills). What does the agent have to back that up? NOTHING.

[masteff]

Another thought... need to look at exactly what your plan says. Some plans paraphrase the regs and a slight change in wording can have an impact.

Remember that the reg in question is merely a safe harbor for hardships. I always view them as having a grey border around them. If you step slightly into that grey area, you're outside of pure safe harbor but not living too dangerously unless you're in direct violation of your own plan document.

[Bird]

QDRO: Suppose the plan is pulled for audit. The agent identifies this (somehow) and even though there is a letter from the uncle as I described the agent says the withdrawal doesn't qualify under the regulations. Suppose further that quality substantiation is provided showing that the home was in fact used as the participant's principal residence (e.g., utility bills). What does the agent have to back that up? NOTHING.

Not only that but I think you have to think twice about what is "conservative" - it seems the assumption is that saying "no" is the safe or conservative position. But, since the regs don't specifically say the participant has to be purchaser, in saying "no" you appear to be denying a participant rights under the plan. I'm not so sure I want to be on that side.