hardship for "casualty loss" three years ago

[AlbanyConsultant]

A participant is trying to get a hardship because (he claims) ever since Hurricane Irene three years ago, his basement floods when it rains heavily, and he finally wants to get it fixed.

1. Is there some kind of statute on how long you can make a claim on a casualty event? Hurricane Irene was in 2011.

2. Presuming that #1 is not an issue, is the plan sponsor OK with accepting the participant's claim that it was caused by Hurricane Irene? I'm not saying that they should have to hire some kind of foundation inspection, but...

Thanks.

[My 2 cents]

Would "My basement floods every time it rains, and I want to do something about it" qualify for a hardship withdrawal? Does it really matter that it started when the house was damaged by the hurricane?

[AlbanyConsultant]

It wouldn't under the IRS safe harbor definition*... unless it's a casualty loss.

* I should have mentioned that the plan uses this

[SearchLight]

This link may help you - it's IRS discussion about casualty losses generally, and discusses the timeframes for a casualty loss to be deductible for tax purposes. Since the safe harbor definition references losses that would qualify for a deduction under section 165, it seems reasonable to look to whether or not it would still be deductible in assessing how-late-is-too-late:

http://www.irs.gov/taxtopics/tc515.html

[masteff]

While I like SearchLight's answer, I would argue the tax year in question 2011 is still open for amendment and therefore the loss technically would still qualify for deduction and I could argue for the plan permitting the withdrawal.

If the plan did permit the withdrawal, I might mitigate risk by putting out a memo to participants stating that after X date, the plan will no allow w/drawals for losses related to Irene. This way, Bob doesn't make a fuss in 6 months that you let Joe do it today. But then be prepared for a flurry of information requests on how to do a hardship, even if they don't take one.

[Guest EE Bene]

If you are using the safe harbor for hardship withdrawals, that also requires taking all possible loans offered under the plan first, correct? Are loans offered under the plan for such a situation? If so, have all loans been taken?

I'm not sure a memo to all participants would mitigate any particular risk in this situation. Proper documentation of this particular hardship withdrawal should take care of that. Why open the door to more hardship claims? If you don't already have a process for processing such requests, you should also get that in place so that any similar request is handled in a similar way. Reviewing such claims in a fair and equitable manner is your key to risk mitigation, not setting an arbitrary drop dead date for such claims.

As to relying on your participant's representations, I think that is generally permissible unless you have reason to know there is some other cause or the participant is not telling the truth. Just make sure to document, document, document.