Loans for Hardship

[msmith]

In January 2016, a participant obtained a loan to pay delinquent property taxes. As a rule, we require proof of the hardship. That loan has been paid in full. The participant has applied for another loan and the documents show the same unpaid property taxes.

The Plan Document and Loan Policy are silent on this and I just wanted to get some opinions as to what other TPAs would recommend to their Clients about approving or denying the loan.

[Mike Preston]

Confusion reigns.....

You require proof of hardship for a ..... loan?

[NJ Mike]

Does your plan document only allow loans for a hardship?  If so, is it for the safe harbor hardship definition?

[msmith]

Loans are only permitted for hardship necessity and they use the same safe harbor standards that is applied for hardship withdrawals.

[Mike Preston]

Then why do you say the plan document is silent.  Seems quite non-silent.

[msmith]

My question is - how would you handle the second loan, when the first loan was not used for the intended purpose. The first loan was granted to pay the 2013, 2014 and 2015 property taxes. His new loan document shows that the same property taxes have not been paid.

[QDROphile]

How could the proceeds of the first distribution not have been used for the intended purpose?  Sounds like bad administrative practices at best.  Now the plan administrator is required to interpret and evaluate the circumstances.  A conclusion would require a lot more than reading these posts, but one conclusion could be that the distribution was issued for those expenses, so those expenses cannot serve to justify another distribution.  And the distribution practices need attention to comport better with the plan provisions. 

[ESOP Guy]

15 hours ago, QDROphile said:

How could the proceeds of the first distribution not have been used for the intended purpose? 

How does the Plan Administrator control what the person does with the money after it leaves the plan?

 

I have always thought this is possible to see happen.  The person gets the check and doesn't use it for the purpose they used to justify the hardship distribution.  I just don't ever recall from my 401(k) days anyone being so brazen as to not spend the money as stated and then ask for more with the same reason. 

 

To me this falls under the Plan Administrators powers to reasonably interpret the plan document provisions in a nondiscriminatory manner.  I think the Plan Administrator needs to decide how they want to handle this situation, document it and be consistent.  It seems logical to deny the withdrawal otherwise what is to stop this person to just keep coming back for more and more money which seems to violate the spirit of the rules and provisions if nothing else.  I have never seen a written rules that covers this fact pattern. 

[david rigby]

The Employer may have a different problem: an employee who has lied.

 

[QDROphile]

"How does the Plan Administrator control what the person does with the money after it leaves the plan?"

If the plan has conditions for the loan, then the proceeds should be distributed in the same way as for hardships.  The payee of the check should be the person to be satisfied.  In this case, the check should have been made payable to the tax authority.  The plan administrator stopped short of making sure the plan terms were carried out faithfully

 

[K2]

I'd start with the idea that to qualify for a hardship, you have to demonstrate that you have no other funds to satisfy the need.  The existence of the prior loan shows that there were other resources available to satisfy the current need.  The current need could have been satisfied with the proceeds of last year's loan.  So there were resources available to pay this bill.  I would be tempted to deny the loan on the basis that money was available.  

Then I'd also be concerned about whether or not the unpaid property taxes need to be paid in order to avoid eviction.  Presumably that's the justification for the hardship, that failing to pay the property taxes will lead to foreclosure and eviction.  But that did not happen last year, apparently, so I'd be asking for additional documentation as to whether or not failure to pay the taxes would lead to eviction.

I think if the plan sponsor has reason to believe that the funds won't be used for the satisfaction of the hardship, then the loan shouldn't be granted.  The fact that the previous loan wasn't used to satisfy the hardship would give me pause.  Perhaps as someone suggested that if the participant really does need the loan, the plan could pay the proceeds directly to the taxing agency rather than to the participant.

Just some thoughts.  I'd be tempted to deny it, but would want to work with the participant so that if they truly do have a hardship that they can get the loan.

 

 

[ESOP Guy]

2 hours ago, QDROphile said:

"How does the Plan Administrator control what the person does with the money after it leaves the plan?"

If the plan has conditions for the loan, then the proceeds should be distributed in the same way as for hardships.  The payee of the check should be the person to be satisfied.  In this case, the check should have been made payable to the tax authority.  The plan administrator stopped short of making sure the plan terms were carried out faithfully

 

Can you make a check payable to someone other then the participant and not violate the anti-alienation rules? 

 

I am thinking of a time I had a bank client and a teller embezzled funds.  She agreed to reimburse the bank using her ESOP account's funds as part of her plea agreement.  All the lawyers agreed the ESOP distribution check couldn't be written to the bank.  It has to be written to the former teller.  She then had to deposit the check into an account at the bank of her own free will.  She then had to sign the bank account over to the bank of her own free will.  The "stick" that was used to make sure she did this was the judged refused to sentence her until she had complied with this condition.  Everyone agreed the reason you had to go through those steps was the anti-alienation rules.  The stick in this case did not negate the idea she used her own free will to turn the funds over to the bank. 

You can't make payments from the plan to a creditor even with the participant's permission has always been my understanding.  I am willing to be told I am wrong here but I have never seen a hardship distribution or loan made payable to a college for tuition for example.  It was always sent to the participant and payable to the participant who had to take cash the check and then pay the college to pay tuition. 

[BG5150]

File this under things I learned today.  A partiicpant can voluntarily assign benefits to a 3rd party.  From our friends at the EOB:

Part F., Exception for certain voluntary assignments

A participant or beneficiary who is receiving benefits under the plan may have obligations to third parties that he wishes to satisfy with those benefit payments. The regulations under §401(a)(13) provide voluntary mechanisms to facilitate the payment of third party obligations with benefit payments.

 

1. Arrangement to pay directly to third party. Treas. Reg. §1.401(a)-13(e)(1) provides that the participant or beneficiary may direct the plan to pay all, or any portion, of a benefit payment to a third party (which may include the individual's employer) if the following conditions are satisfied: (1) the arrangement must be revocable, and (2) the third party must file a written acknowledgment with the plan administrator. The written acknowledgment must state that the third party has no enforceable right in, or to, any plan benefit payment. See Treas. Reg. §1.401(a)-13(e)(2). The arrangement can only apply to a particular payment. A continuing arrangement with respect to future payments, is subject to the limitations described in 2. below, although an authorization covering a series of payments may be permissible under this exception (see 1.b. below).

[BG5150]

forgot an example from the quote:

 

Quote

1.a.

Example. Lester is receiving a lump sum distribution from his employer's profit sharing plan. The lump sum distribution is for $40,000. Lester owes $8,000 to creditor X. He enters into an revocable arrangement to pay creditor X, and X files the written acknowledgment described in 1. above. The payment of $8,000 to X under this arrangement is not a violation of the antiassignment rule.

[msmith]

Thanks to everyone for their very helpful comments. I am not sure if a County Treasurer's office would accept a 3rd party check. In particular - this County.

I believe I will deny the loan and discuss with the Plan Sponsor.