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Can a Plan add a stipulation that to take a Harship Distbribution, any outstanding Loans must be paid off first?


Guest heatherrfr

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Guest heatherrfr

We have a client who has inquired about amending the Plan to require a participant with an outstanding loan, who then requests a hardship distribution, to pay back the loan before they can take the hardship. Is this allowed?

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What is the employer trying to accomplish? If it is truly a hardship situation, then the employee by definition doesn't have the money to payback the loan FIRST, so the effect of this policy would be to prevent these ees from taking a hardship. If that's the objective why not just amend the plan to eliminate hardship distributions?

The plan already has up to 1/2 the account balance as collateral, so loan security is not an issue. If the plan only allowed hardships to participants with no outstanding loans this could create run afoul of the "reasonably equivalent basis" criteria. Hard to see how this is a good idea without understanding what the employer is after.

I carry stuff uphill for others who get all the glory.

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Guest heatherrfr

shERPA- Thank you for confirming what my gut was basically saying. It just didn't make sense to try and do this.

The Trustee was concerned that after the loan & subsequent hardship, that the participant only had $30 left in their account. It's unclear at this point why he came up with the idea to inquire if this was something they could do. I've asked our distribution department to try and get some more information as to what they were trying to accomplish with the requirement and if I hear more, I will definitely let you know.

Lou S.- Yes, the participant is supposed to exhaust every other loan & distribution option first before taking a hardship according to Safe Harbor standards.

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That seems counterproductive on a participant level. Regs say the participant does not have to take counterproductive measures in order to qualify for the hardship.

"In order for you to take a hardship distribution of $3,000, you must first pay back the outstanding loan of $5,000."

"But, wait, Mr. Administrator. How can I pay the $5,000 back, when I need $3,000?"

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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