Hardship Withdrawals - Timing of Medical Bills

[Danny CPA]

A participant has requested a hardship withdrawal to pay medical bills. They have old medical bills that are in collections at this time, and the date of service was back in 2015 and 2016. They even have a couple from the end of 2017, but nothing in the past 6 months. 

Is there a time limit on the medical bills, or is there a point in time where it changes from medical expenses to debt? 

What are the thoughts on approving this hardship?

[Larry Starr]

If they are unreimbursed medical expenses and the participant is otherwise eligible for a hardship distribution, then there is no effective time limit, though I'm not sure about accepting expenses for a time prior to participation in the plan.  The unreimbursed medical expenses ARE A DEBT until  paid.  The characterization as medical expenses never changes.

[Danny CPA]

Thank you. One of the partners in my office argued that we don't allow hardships for student loan repayments, and this is similar. Although the difference in this situation is the hardship qualifying event (tuition) was already paid, but the medical bills are still medical bills.

Any other thoughts/opinions?

[Larry Starr]

1 hour ago, Danny CPA said:

Thank you. One of the partners in my office argued that we don't allow hardships for student loan repayments, and this is similar. Although the difference in this situation is the hardship qualifying event (tuition) was already paid, but the medical bills are still medical bills.

Any other thoughts/opinions?

Danny,

Just to make it clear:

It doesn't matter if the medical bills were paid or not; they only have to be unreimbursed for the rules to apply.  The employee might have paid them, but they still are entitled to have the hardship distribution determined with regard to the amount of the unreimbursed medical expenses.

[QDROphile]

Please elaborate.  You lost me.  If medical expenses have been paid, even with borrowed money, how are they eligible for a hardship distribution?

[Larry Starr]

Because it doesn't matter if they are paid; when we are talking about medical bills, the bills themselves are a hardship assuming they were not covered by insurance (that's the unreimbursed part).  There is no requirement that the bills be still owed (that is, unpaid).  There just isn't.

 

[RatherBeGolfing]

This question was asked at the 2013 ASPPA Annual conference.  The IRS panel agreed with ASPPAs proposed answer that:

Quote

There is no requirement under the hardship portion of the 401(k) regulations relating to how the participant must pay his/her medical expenses. The nature of the expense controls its eligibility for hardship treatment (along with the other hardship requirements), not the manner in which the participant pays the expense.

 

[EPCRSGuru]

I don't really understand the argument that unreimbursed medical expenses are eligible for a hardship withdrawal if they have already been paid.  As I understand the requirements,  a hardship distribution is not considered necessary to satisfy an immediate and heavy financial need of an employee if the employee has other resources available to meet the need.  If the expenses have already been paid that would indicate that other resources were available to meet the need, right?  What would prevent a person who needs money to buy a car (not allowed) from pulling out his old paid medical bills, getting a hardship distribution, and buying a car with the proceeds?  

I do agree that as long as the medical expenses have not been paid or reimbursed they are still eligible, even if old.

[QDROphile]

Exactly.  One has to look at the definition of hardship.  Availability of credit is a financial resource.  That is why we have recurring discussions about exhausting availability of plan loans before hitting hardship withdrawal.

[Larry Starr]

1 hour ago, RatherBeGolfing said:

This question was asked at the 2013 ASPPA Annual conference.  The IRS panel agreed with ASPPAs proposed answer that:

 

I believe I wrote that answer! :-)

[RatherBeGolfing]

1 minute ago, Larry Starr said:

I believe I wrote that answer! :-)

That wouldn't surprise me.  I posed the original question on one of the linkedin message boards and you squeezed it into the IRS Q&A as the very last question

[Larry Starr]

31 minutes ago, EPCRSGuru said:

I don't really understand the argument that unreimbursed medical expenses are eligible for a hardship withdrawal if they have already been paid.  As I understand the requirements,  a hardship distribution is not considered necessary to satisfy an immediate and heavy financial need of an employee if the employee has other resources available to meet the need.  If the expenses have already been paid that would indicate that other resources were available to meet the need, right?  What would prevent a person who needs money to buy a car (not allowed) from pulling out his old paid medical bills, getting a hardship distribution, and buying a car with the proceeds?  

I do agree that as long as the medical expenses have not been paid or reimbursed they are still eligible, even if old.

Perhaps we incorrectly assumed they were using the safe harbor definitions of hardship (I haven't ever seen a small business plan that did otherwise).  In safe harbor, you don't have to deal with the "other resources" issue, and I would suggest anyone who is trying to use non-safe harbor rules is crazy! All you have to do is have unreimbursed medical expenses (and, if there are loans available, deal with that requirement - another reason why we didn't have loans in our plans historically).

Remember, a hardship distribution is DEEMED to be on account of a immediate and heavy financial need if it is for unreimbursed medical expenses for the participant, spouse or dependent of the participant.

 

[pmacduff]

One more thought about the medical bills...if they are, in fact, still open we find that most medical facilities/practices, etc. in our area are more than happy to provide a current statement reflecting the outstanding amount(s) owed.  Their goal is to get paid however possible

 

[ACK]

Danny CPA - with respect to your question about the difference between the medical bills and student loans bills, the hardship rules with respect to tuition state that the hardship may be taken for fees for the next 12 months.  In other words, it is for upcoming educational expenses, not "past" expenses that have already been covered by a student loan.  Whereas a medical expense hardship is typically related to expenses that have already occurred.

[ldr]

@ ACK, Good morning!  We are having this very discussion this morning in our office.  A participant has applied for a hardship withdrawal for a dependent's upcoming tuition.  He has furnished a bill for tuition due on August 20th.  Standard protocol in our office has been to look backwards, not forwards, and we seem to be under a mistaken impression that it is for past expenses, not upcoming expenses, on the theory that someone could take a HSW for a future event and then just not show up for classes and do something else with the money.

This appears to be an erroneous line of thinking on our part.  Could you tell me where to find "chapter and verse" that explain the "next 12 months" stipulation with regards to tuition?

Thank you in advance for your help!

[ldr]

@ACK - I should have looked on the IRS website first - sorry - it's right there in the Retirement Topics - Hardship Distributions.  Very clearly the next 12 months.

[Larry Starr]

On 8/1/2018 at 2:09 PM, ldr said:

@ACK - I should have looked on the IRS website first - sorry - it's right there in the Retirement Topics - Hardship Distributions.  Very clearly the next 12 months.

Maybe you should have even checked the plan language first; I bet it's even right there in your SPD!

 Mine says (among the hardship allowances):

Tuition, related educational fees, and room and board expenses for the next twelve (12) months of post-secondary education for yourself, your spouse, your dependent or your beneficiary. (emphasis added)

What does your SPD say?

[ldr]

@Larry Starr

Mine says virtually the same thing.  Point well taken.  It's not my primary area of responsibility and I assumed that the protocol here was established by someone who had trained those who are responsible.  Proof just once more about making assumptions and what that leads to!  

[Ray H]

Can you apply for a Medical Hardship if you have not paid anything on an outstanding medical bill that is owed or do you have to have paid on the medical bill in order to apply for the Medical Hardship

[ACK]

Ray H, yes a participant may apply for hardship if they have not paid anything toward the bill.  I would just want to be sure any insurance has been applied first, and the bill is for the remaining amount that is due from the individual.

[PEG12]

Our SPD does not specifically state that a medical expense needs to be unpaid, but rather only states it needs to be unreimbursed. As such, can you deny a hardship distribution for paid unreimbursed medical bills?

Our applicant submitted proof of $30k in recently paid medical bills along with EOB's showing no reimbursement from insurance. His Doctor requires 100% cash/credit card payment at the time services are rendered and requires patient's file their own insurance claim for reimbursement after the visit. We confirmed that this is their payment policy.

In this case, our applicant had to pay for all his medical expenses in full or forgo treatment. Our plan administrator denied his hardship distribution request since his medical bills, although unreimbursed,  have already been paid. Is it legal and/or justified for us to deny his hardship distribution in this rare type of situation?

It seems like we are discriminating against cash pay patients by not allowing them access to their 401(k) just because their expenses are paid. He claims to have paid the bills by completely exhausting his entire savings account, which has created an immediate and heavy financial burden as he is still receiving medically necessary ongoing treatment as confirmed by the recent letter from his physician. How would you handle this? 

Thank you,

Peggy

[RatherBeGolfing]

On 3/26/2019 at 12:50 AM, PEG12 said:

Our SPD does not specifically state that a medical expense needs to be unpaid, but rather only states it needs to be unreimbursed. As such, can you deny a hardship distribution for paid unreimbursed medical bills?

Our applicant submitted proof of $30k in recently paid medical bills along with EOB's showing no reimbursement from insurance. His Doctor requires 100% cash/credit card payment at the time services are rendered and requires patient's file their own insurance claim for reimbursement after the visit. We confirmed that this is their payment policy.

In this case, our applicant had to pay for all his medical expenses in full or forgo treatment. Our plan administrator denied his hardship distribution request since his medical bills, although unreimbursed,  have already been paid. Is it legal and/or justified for us to deny his hardship distribution in this rare type of situation?

It seems like we are discriminating against cash pay patients by not allowing them access to their 401(k) just because their expenses are paid. He claims to have paid the bills by completely exhausting his entire savings account, which has created an immediate and heavy financial burden as he is still receiving medically necessary ongoing treatment as confirmed by the recent letter from his physician. How would you handle this? 

Thank you,

Peggy

NOTE: My answer assumes that the plan uses the safe harbor definition of hardship. 

I think it does qualify as a hardship because the nature of the expense is what determines eligibility under the safe harbor hardship rules.  In my example that was submitted to the IRS Q&A (answers are the opinions of the panelists not the IRS), hospitals in my are started to require payment before procedures, though I believe it was limited to deductible and co-payments rather than the full expense.  If the patient couldn't cover it, they would establish a credit line through a commercial medical financing company like MedMax or CareCredit.  So rather than having people pay $10 a month to the hospital forever, they now basically have a credit card debt.  Because of timing issues, it would be difficult for the patient to apply for and receive a hardship without causing delays to the procedure.  So my question was, is this now simply a commercial debt (still a hardship) rather than a medical debt?  Does it no longer fit under the safe harbor hardship rules?  The IRS panelists agreed that it didn't matter that the payment was made with other assets (in this case medical credit) because the medical expense created the hardship.

In your case, it is a little different because the use of savings rather than credit means that there is no longer a debt for the procedure like you would have with a credit line.  I don't think that it should matter.  If I have $1,000 in my bank account that Is budgeted for future expenses and I use that $1,000 to pay for a medical procedure, I still have a need for $1,000 that I wouldn't have had were it not for the medical procedure.  The hardship was created by the medical need, and the hardship is still there.  

I'm sure the participant still has a need for his savings.  He had to make the payment to get access to the medical procedure, THAT is the hardship.  Had the doctor not required payment before the procedure, the participant would have had a debt to the doctor that no one would argue ineligible for a hardship under the safe harbor rules just because the participant has savings.  Right?  That is because it is the nature of the expense that controls.

As the participant, I would appeal.  Under Reg. § 1.401(k)-1(d)(3)(iii)(B), 

Quote

A distribution is deemed (my emphasis) to be on account of an immediate and heavy financial need of the employee if the distribution is for - 

(1) Expenses for (or necessary to obtain) medical care that would be deductible under section 213(d) (determined without regard to whether the expenses exceed 7.5% of adjusted gross income);

This is still an expense for medical care.   In my opinion, the Plan Administrator improperly denied the hardship.  Since a medical expense is deemed  to be to be on account of an immediate and heavy financial need, it would be improper to consider additional facts and circumstances determine immediate and heavy financial need.  

If the plan does not use the safe harbor definition for hardship distributions, it is a facts and circumstances determination.  I would not have a problem approving the hardship under a facts and circumstances test, but I don't think I would go as far as saying that it would be improper to deny it.  I would still appeal either way as the participant, and considering the significant amount we are talking about, I would take it to the DOL if my appeal was denied.  

[Kevin C]

What does the plan and the SPD say about the maximum amount for a hardship distribution?  It should have something describing this:

Quote

1.401(k)-1(d)(3)(iv) Distribution necessary to satisfy financial need—(A) Distribution may not exceed amount of need. A distribution is treated as necessary to satisfy an immediate and heavy financial need of an employee only to the extent the amount of the distribution is not in excess of the amount required to satisfy the financial need. For this purpose, the amount required to satisfy the financial need may include any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution.

If the financial need that qualifies for a hardship has already been paid using the participant's savings, I'm not seeing how anything additional is required to satisfy the original need.  If the lack of cash creates another financial need that satisfies the hardship provisions, the participant should qualify for a hardship distribution based on the new financial need.  If the new need doesn't qualify and the plan document's hardship provisions aren't or can't be amended to make it qualify, then they have to follow the terms of the plan and deny the request. 

It was mentioned that there will be additional medical bills as treatment continues.  Hopefully, the participant can get something in advance from the doctor showing the amount needed that can be used to substantiate a hardship distribution. 

 

[RatherBeGolfing]

On 3/27/2019 at 10:29 AM, Kevin C said:

What does the plan and the SPD say about the maximum amount for a hardship distribution?  It should have something describing this:

If the financial need that qualifies for a hardship has already been paid using the participant's savings, I'm not seeing how anything additional is required to satisfy the original need.  If the lack of cash creates another financial need that satisfies the hardship provisions, the participant should qualify for a hardship distribution based on the new financial need.  If the new need doesn't qualify and the plan document's hardship provisions aren't or can't be amended to make it qualify, then they have to follow the terms of the plan and deny the request. 

It was mentioned that there will be additional medical bills as treatment continues.  Hopefully, the participant can get something in advance from the doctor showing the amount needed that can be used to substantiate a hardship distribution. 

I disagree.  The unreimbursed medical expense itself is deemed to be a hardship under the safe harbor rules.  The fact that the participant had to rob Peter to pay Paul in order to actually get the procedure does not make the medical expense ineligible for the hardship distribution.  This question has been put before IRS panelists who agree that it is the nature of the expense itself that qualifies for the hardship.  

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