Hardship after loan default

[Bird]

Let's say a participant deferred $25000 over the years. He takes a loan, and defaults to the tune of $22000. There is $7000 left in the investment account, so there were gains of $4000. Now he wants a hardship...would you say he can take the full $7000, where the defaulted loan used up gains and some deferral contributions, or only $3000, where the defaulted loan used up deferral contributions only?

I'm leaning towards the first, in the absence of guidance, at least as far as I know.

[Lou S.]

I am not aware of any IRS guidance on this subject either.

I would err on the side of caution and say the defaulted loan reduced his amount available for hardship as he never really had a distributable event when the loan defaulted. So I would say he only has $3,000 available now for hardship.

But as I said, I'm not aware of any formal guidance. If someone does have a citation, that would be great.

[BG5150]

Is the entire account deferral? Or does the document limit hardships to deferrals only?

(Defaulting $22k when he deferred $25k implies there were other sources in the account. Unless his investments did really well and he doubled his 401(k) account)

[D Lewis]

Not to answer for Bird, but I am familiar with the case.

The plan limits hardships to deferrals and rollovers. There are/were other employer sources in this participant's account (no rollovers).

[Kevin C]

When the loan was originally taken, what sources were used to fund the proceeds?

[Bird]

I tried to simplify it by ignoring other sources - loans and hardships were from deferrals only. Yes he had enough in other sources to qualify for a loan larger than 50% of deferrals.

deferral contributions 25000

loan taken for, let's say 23000, some payments made, defaulted at 22000

gains and loan interest total 4000

7000 in investment account now

[hr for me]

I don't post often, but would agree that his amount available would be the $3000 in non-defaulted deferrals.

Back in the olden-days, we had buckets for certain calculations (post-86, pre-87 aftertax,hardship amounts available etc). That bucket would have decreased when the loan was taken and then increased over loan payment time as deferrals plus earnings were paid back. Since he defaulted on the loan, those loaned deferrals would never have made it back into the bucket to be available later for another loan or hardship (especially if the plan do specifically stated only deferrals for those)

Don't know if 401k recordkeeping system still keeps those kinds of buckets or not, but I agree with your reasoning.