Questioning Hardship amount that would be allowed

[bpenfold]

Hello all!

I have a participant, who also happens to be the president of the company, (we are the trustee) who is considering a hardship. He is past due on his mortgage and has the past due notice for proof. It is not in a foreclosure status yet. But he knows it will get to that point and he is being proactive. He is requesting a hardship amount that equals about 6 months of mortgage payments to prevent any foreclosure to happen. He is putting the house on the market and hoping it sells before then.

I read somewhere that the hardship event doesn't have to be unforeseeable and he is deeming this as necessary to not lose his home.

In someone's expert opinion - Would the 6 months worth of mortgage payments be allowed? OR - his other option is to request a hardship every month when he is past due? With that second option he will be prolonging his ability to contribute to the plan for a long time.

Thank you in advance!

[BG5150]

Hardships are for immediate need, not to lessen future burdens.

[bpenfold]

14 minutes ago, BG5150 said:

Hardships are for immediate need, not to lessen future burdens.

Then would you say his only option is to request a hardship every time he needs it?

[BG5150]

If the plan document allows for it.

[CuseFan]

You can also increase the distribution for anticipated tax liability but do not need to actually withhold that amount for taxes, so that provides more cushion toward future payments - but also potentially make him severely under withheld come next 4/15.

[chc93]

Interesting... I think tuition payments for post-secondary education can be for the next 12 months.  If so, I wonder it that would apply here...

[bpenfold]

25 minutes ago, chc93 said:

Interesting... I think tuition payments for post-secondary education can be for the next 12 months.  If so, I wonder it that would apply here...

That is also what I gathered from reading the FAQ's on the IRS website. See the sentence that I underlined below:

2. What is the IRS definition of hardship for a 401(k) plan?

For a distribution from a 401(k) plan to be on account of hardship, it must be made on account of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need. The need of the employee includes the need of the employee's spouse or dependent. (Reg. §1.401(k)-1(d)(3)(i))

Under the provisions of the Pension Protection Act of 2006, the need of the employee also may include the need of the employee's non-spouse, non-dependent beneficiary.

Whether a need is immediate and heavy depends on the facts and circumstances. Certain expenses are deemed to be immediate and heavy, including: (1) certain medical expenses; (2) costs relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) burial or funeral expenses; and (6) certain expenses for the repair of damage to the employee's principal residence. Expenses for the purchase of a boat or television would generally not qualify for a hardship distribution. A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.
(Reg. §1.401(k)-1(d)(3)(iii))

[BG5150]

I think for tuition, the regs even say they can be for 12 months.  Not so with mortgage payments.

[RatherBeGolfing]

58 minutes ago, BG5150 said:

I think for tuition, the regs even say they can be for 12 months.  Not so with mortgage payments.

Absolutely correct.  

 

1 hour ago, bpenfold said:

A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.

This does not make a future mortgage payment a hardship.  What your highlighted passage means is exactly what it says.  Contrast that to section 457 unforeseeable emergency which requires the expense to be beyond the participants control.

You still need the mortgage payment to be currently due in order to get a hardship distribution.  future payments, even if you know you wont have the money to pay them, are not a hardship until the payment is actually due.  I would even go as far as to argue that a past due notice is not enough unless it also specifically mentions foreclosure, but others might disagree.

[Bill Presson]

Might want to consider amending the plan to allow loans. He might be able to get more money and won't have a taxable situation.

[bpenfold]

35 minutes ago, Bill Presson said:

Might want to consider amending the plan to allow loans. He might be able to get more money and won't have a taxable situation.

Yes - that would be a great solution but he has already used up that option in the plan.

[BG5150]

That, and he already has a loan he cannot pay.  To the bank.

[bpenfold]

3 hours ago, BG5150 said:

That, and he already has a loan he cannot pay.  To the bank.

I think my suggestions will be this:

I noticed he has some room to borrow as a loan. Not much - but I will let him know he needs to utilize that amount first.

After that he can do a hardship request for the outstanding mortgage payment grossed up for taxes.

After that I am not sure. The plan doc doesn't specify the amount of times he can take a hardship so I am not sure where to refer for that question. Anyone else know?

Thank you to everyone for their responses so far.

[BG5150]

He does NOT have to take a loan before a hardship if the loan will result in a counterproductive measure to his situation.

[RatherBeGolfing]

46 minutes ago, bpenfold said:

The plan doc doesn't specify the amount of times he can take a hardship so I am not sure where to refer for that question. Anyone else know?

As long as he can show that there is a legitimate hardship, and he has a balance available in nonrestricted sources, he should be able to take hardships as needed.  

 

[BG5150]

Plan docs can limit the number of times participants can take in-service withdrawals.

[Lisa Robertson]

I would not allow the hardship.  The regs state that the hardship is to prevent foreclosure not to stop the possibility of foreclosure.  I have heard IRS agents at conferences and in audits state that if the bank is just sending a letter stating the loan could go into foreclosure it does not meet the hardship rules. In order to meet the hardship rules, the lender must be starting foreclosure proceedings.  A letter from the lender stating the exact amount required to stop the proceedings and the date it must be paid by is the preferable form of proof.  As for the gross up of additional payments, I have heard a mixed bag.  Some agents have said the only amount a participant can get is the exact amount needed grossed up for tax withholding others have said it is ok to add 1 additional mortgage payment.

With all the scrutiny on hardships and loans it is better for the plan sponsor to take a very conservative approach.