Proof of Hardship

[AKPension]

Participant sends in a Hardship request for "Expenses for the repair of damages to my principal residence that would qualify as a casualty deductions".   The proof submitted looks like he is not just repairing the damage but making major upgrades to his home.  Is this allowed?  

[RatherBeGolfing]

Is the upgrade part of the repair?  

[AKPension]

For an example, house is 900 SQ feet and the roof estimate is $32,000 and new ceramic tiles estimate is $25,000

 

 

[BG5150]

Is something like that truly deductible under 165? (is that the number?)

[TPAJake]

I always have trouble with these as well--It's obvious that it's not JUST a repair, but at the same time I'm no contractor, so who am I to argue with their estimates?   

[Belgarath]

Well, the underside of the roof is panels of Renaissance Italian Fresco paintings by Michaelangelo, while the tiles have been handcrafted by Buddhist monks from an inaccessible Tibetan monastery, and "pre-trodden" by beautiful virgins with feet that have been pedicured daily in sacred lavender water and precious oils.

All kidding aside, I would say that if it is a major improvement including things NOT DAMAGED by the "event" causing the damage, rather than "reasonable" repairs, that it isn't allowable. Some repairs are necessarily upgrades, but at some unknown point it crosses over from reasonable/necessary to no longer allowed. I'm not sure just where that line is...

[Peter Gulia]

Would following the IRS's guidance allowing a claims administrator to rely on the claimant's description without reading source documents make evaluations of this kind unnecessary?

https://www.irs.gov/pub/foia/ig/spder/tege-04-0217-0008.pdf

 

[RatherBeGolfing]

58 minutes ago, Fiduciary Guidance Counsel said:

Would following the IRS's guidance allowing a claims administrator to rely on the claimant's description without reading source documents make evaluations of this kind unnecessary?

https://www.irs.gov/pub/foia/ig/spder/tege-04-0217-0008.pdf

 

I don't think so, but time will tell. The memo is not guidance, it is a guideline for IRS examiners.  It also only directs the examiner that plans should be treated as satisfying the substantiation requirements if all the steps in the memo are met.  If the steps of the memo are not met for whatever reason, we are right back to square one.

[Belgarath]

for anyone's reading pleasure:

https://www.irs.gov/pub/irs-pdf/p547.pdf

[Peter Gulia]

RatherBeGolfing is right that the IRS's memo (and the scheduled revision of the Internal Revenue Manual) is not a rule to which a court need defer.  And the memo states it is not a pronouncement of law.

Yet some plans' administrators (or claims administrators) might find it's reasonable to consider the IRS's internal guidance to IRS employees in designing a plan's claims procedure.  Some consider it unlikely that a person other than the IRS would pursue enforcement of a plan's provision that restricts a distribution to a participant who has a hardship.

While the public policy tries to set bounds on which before-retirement needs are important enough to allow an early payout, some employers feel it's odd for a participant's employer to be stuck with the responsibility of deciding whether a use of property that doesn't belong to the employer is worthy within the public policy.