Hardship / Casualty Loss

[austin3515]

Got a participant pushing hard about how he should be able to use a hardship distribution to pay him back for a pool liner that was damaged in a storm. I say no because the pool is not part of the "principal residence", and when I went to prove my point by looking up that definition I found it was not defined. So perhaps one persons definition of residence might include the pool (as distinguished from say a car which can be moved away).

Let me know if you have any light to shed. It certainly seems that there is room for a casualty loss deduction under 165 for the pool liner - but there does not appear to be a requirement under 165 that he principal residence be the property that is damaged.

[jpod]

There are many other places in the Internal Revenue Code and regulations where the term "principal residence" is used. If it has been defined in any such other context to include OR EXCLUDE an outdoor in-ground pool, I would assume that the Plan Administrator could comfortably rely on that without worrying about plan disqualification. Unfortunately that creates a research project for you or someone else.

[J Simmons]

I would lean towards denying the request. The house is yet inhabitable, I presume, despite the damage to the pool. The pool is a luxury. Just because it is on the lot (and within the curtilage) that the residence structure is, I don't think that snags it into 'hardship' territory.

[MWeddell]

I would lean toward granting the request. In other contexts, e.g. the sale or purchase of a prinicipal residence, the tax code would include the swimming pool as part of the principal residence. Where the phrase is not defined in the hardship withdrawal regulations but the phrase "principal residence" does seem like a technical term and not just ordinary language, it seems most reasonable to me to like elsewhere in the Internal Revenue Code for what that phrase means.

Note that this is a safe harbor event, an event that is deemed to satisfy the hardship distribution requirements. Hence, it does not really have to be an immediate and heavy financial need based on the facts and circumstances. For this reason, I find J Simmons' post to be unpersuasive: yes a pool is a luxury but that's not relevant in my opinion.

[austin3515]

But at least when you are buying a home that has a pool, the actual dwelling is included in the use of proceeds. That would not be the case in my situation, so I still find J Simmons argument persuasive

[GMK]

When the pool owner repairs the damage to the pool, the cost of those repairs increases the owner's basis in the property (IRS Publication 523). My impression is that "principal residence" includes not just the house, but all of the property where the person lives, in contrast to the person's "secondary" residences (second home and vacation properties). This leans me with MWeddell, but I'm not a lawyer.

Plan administrators maybe should consider adding a plan policy for hardships that prescribes some of these kinds of things with specificity, but in the present case, that boat has already sailed.

[Belgarath]

FWIW - I'd lean towards allowing it. The pool is part of the value of the principal residence, and if it is damaged, the principal residence is decreased in value. Let me ask a question: would you deny it as a hardship if the unattached 2-car garage was destroyed in a storm? I don't really see that a pool is any different.

[austin3515]

How about this perspective: The owner (age 40) of the sponsor lives in a $2MM dollar home. The pool is damaged in a storm and requires $75,000 of work. The hardship is processed for $75,000 to repair the pool. The plan is selected for an IRS audit and the auditor wants to see the support.

How worried are you? I would be telling the client that he/she should be inquiring about legal counsel...

Now I know, there is a needs question, but do recall that you are allowed to rely on the representations of the Participant with respect to the needs part of it. For all I know, the owners money is all tied up in overseas junk bonds.

[Belgarath]

Well, this is sort of a mix of apples and oranges. My answer was based upon the assumption that you have appropriately established financial need, either through the "safe harbor test" or the "facts and circumstances" test, - whichever is required in your document.

[GMK]

so if we assume an immediate and heavy financial need exists, then from

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---Hardship-Distributions

you can rely on the employee's written statement that the need cannot be relieved from other available resources ..."Unless the employer has actual knowledge to the contrary," and in this case the employer will know. So, if the owner may have other available resources, the Plan could ask for documentation beyond the written statement. The auditor will probably want to know who approved the hardship distribution. Could get messy; could come out clean.

[masteff]

Not conclusive but I might point in IRS Pub 523 on page 10 that the list of "Decreases to Basis" includes "deductible casualty losses". On page 9 it gives "swimming pool" as an example of an increase in basis. Since the hardship reg specifically says w/out regard to deductibility of the loss, I would print those two pages from the publication and attach to the documentation to show why you concluded the pool was part of the residence. While you can clearly have a "principal residence" that does not have a swimming pool, I don't think that prohibits a swimming pool from being part of the residence. Does the pool have its own electric and water feeds or does it get fed from the main structure?

Or I could, instead, point out that 280A seems to equate "principal residence" with "dwelling unit" which would exclude an outdoor pool. But that's the only section I found which uses that narrow of a definition and it's done for a very specific limited purpose in the tax code.

[austin3515]

I can't get away from the fact that the spirit of the reg was to make sure that someone whose "roof over there head" was destroyed or severely damaged in a hurricane could get money from the Plan. Because at least one reasonable definition of principal residence would refer to the actual "dwelling unit" I cannot justify extending it to all fixed property on the lot. What about the tennis court? What about the shed holding the lawn mower? The fire pit? The putting green? The horse stables? This appears to be a slippery slope if you go outside the four walls of the house.

[BG5150]

Are you the plan administrator?

[austin3515]

I'm the guy the Plan Administrator turns to for advice. I don't like to go to my clients and say "it's up to you" because my clients hired me for my expertise in these matters. I can say "well, it's a little gray but I think it is too aggressive to approve." But I would not say "well it's 50/50 so you need to make the call."

[K2retire]

It sounds like everyone agrees that it is a casualty loss, the issue is whether or not it is part of the principal residence. Assume for a moment that the homeowner were to list the property for sale. Would it even be possible to sell the house without selling the pool? In that context it seems to be pretty clear that the pool is part of the residence.

[austin3515]

You know what, I'm going to submit this to the ASPPA IRS Q&A. This is ridiculous. There should be a definition somewhere.

[J Simmons]

Hey, all that's at stake is the tax qualification of the entire plan. Surely helping the owner get some money out of the plan early to fix his swimming pool outweighs that, right?

[austin3515]

That was my hypothetical to prove a point. Either the pool is in or it isn't. If my example seems egregious, the logic should not change just because of a few extraneous details. Even the owner in my example would be eligible to pay for a liver transplant with a hardship distribution without receiving a second glance.

[John Feldt ERPA CPC QPA]

Perhaps if you inquire about the participant's family history - did they descend from a line of mermaids? Thus eliminating any question about the principal residence?

[BG5150]

Maybe you should consult an ERISA attorney.

[MWeddell]

How about this perspective: The owner (age 40) of the sponsor lives in a $2MM dollar home. The pool is damaged in a storm and requires $75,000 of work. The hardship is processed for $75,000 to repair the pool. The plan is selected for an IRS audit and the auditor wants to see the support.

How worried are you? I would be telling the client that he/she should be inquiring about legal counsel...

Now I know, there is a needs question, but do recall that you are allowed to rely on the representations of the Participant with respect to the needs part of it. For all I know, the owners money is all tied up in overseas junk bonds.

I would be less worried in your hypothetical than if the hardship withdrawal request were denied.

If you are unsure, then advise the client now to consult with legal counsel and make clear the degree of uncertainty in your recommendation, not afterward.

[austin3515]

I would be less worried in your hypothetical than if the hardship withdrawal request were denied.

So you would approve the owners request in my example?

[GMK]

Even the owner in my example would be eligible to pay for a liver transplant with a hardship distribution without receiving a second glance.

Drinks a lot, does he?

I'd be less concerned about pool's being part of the principal residence and more concerned about the plan sponsor's owner approving a hardship to fix his own pool when he has some or all of the $75k available from other sources. In other words, load the file up with documents showing that other resources were not available.

But, as BG said, I wouldn't approve or deny this one without advice from an ERISA attorney.

[MWeddell]

I would be less worried in your hypothetical than if the hardship withdrawal request were denied.

So you would approve the owners request in my example?

I would consider the issue ambiguous enough to refer back to the official plan administrator, even if the client was outsourcing administration of the hardship withdrawals to me based on the client's written policy. That being said, I would tell that the client that I would lean toward approving the hardship withdrawal request. This assumes the resources portion of the test was satisfied -- some of the comments above by others question that.

[BG5150]

If the plan uses the Safe Harbor reasons, I don't think the resources portion of the test applies. It's merely an immediate and heavy financial need. As long as there are no other distribution options in the plan, and a loan is not counter-productive (don't get me started on this piece of great legislation!), I think he would be good to go if:

1) the pool could be considered part of the principal residence; and

2) the "casualty" is deductible under sec. 165.

As "backup" you may want something in writing from the participant, or the participant's tax adviser, that the event is indeed deductible. If it's not,t he argument ends there.

[My 2 cents]

I've lost track - is this the thread where the storm damage occurred a few years ago or is the damage to the pool recent?

[austin3515]

Just happened.

[BG5150]

You know what, I'm going to submit this to the ASPPA IRS Q&A. This is ridiculous. There should be a definition somewhere.

Got a participant pushing hard about how he should be able to use a hardship distribution to pay him back for a pool liner that was damaged in a storm. I say no because the pool is not part of the "principal residence", and when I went to prove my point by looking up that definition I found it was not defined. So perhaps one persons definition of residence might include the pool (as distinguished from say a car which can be moved away).

Let me know if you have any light to shed. It certainly seems that there is room for a casualty loss deduction under 165 for the pool liner - but there does not appear to be a requirement under 165 that he principal residence be the property that is damaged.

Did you post the question? Did you ever get an answer?

[austin3515]

It's funny, I submitted 2 questions but I lost track of the ASPPA Q&A with the IRS that those questions related to. Did anyone ever see the Q&A? Would you be willing to post it here? I submitted this and a really wild one about a SH Match Plan with an insane top-heavy minimum b/c the document forced forfeitures to be reallocated as PS.