Hardship Withdrawal "Immediate and Heavy Financial Need"

[kmhaab]

Participant submitted request for a hardship withdrawal in order to pay the retainer necessary to hire a criminal defense lawyer for a family member (not spouse or dependent). 

Clearly, this doesn't fall under the safe harbor. BUT the 401k plan states that a hardship withdrawal may be allowed for "any other situations that, based on the facts and circumstances,  the Committee determines to constitute an immediate and heavy financial need."

Thoughts on whether this could be allowed under IRS regs?  I think main issue is whether this is a need of the Employee's, as required (or spouse/dependent/primary beneficiary).  If payment of funeral expenses for a "family member" can be considered a need of the Employee (as stated in regs), can that logic be extended here?  Cost to hire lawyer to keep "family member" out of jail could be considered a need of the Employee? (i.e. Father "needs" to keep adult child out of jail? has no expectation to repayment, etc.) 

Interested in what you all think...

[BG5150]

Hardships under facts and circumstances can be for almost anything.  There are many financial considerations to consider, though.

From:  https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-hardship-distributions

A 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, including assets of the employee's spouse and minor children. Whether other resources are available is determined based on facts and circumstances. Thus, for example, a vacation home owned by the employee and the employee's spouse generally is considered a resource of the employee, while property held for the employee's child under an irrevocable trust or under the Uniform Gifts to Minors Act is not considered a resource of the employee. (Reg. §1.401(k)-1(d)(3)(iv)(B))

So, if they have a brokerage account, or a pleasure boat, or even a coin collection, then they may have other resources available.

[stephen]

In my opinion this is an example of when the non Safe Harbor Hardship Distributions provisions muck the situation up for the Plan Administrator.

[Larry Starr]

On 12/12/2018 at 7:11 PM, kmhaab said:

Participant submitted request for a hardship withdrawal in order to pay the retainer necessary to hire a criminal defense lawyer for a family member (not spouse or dependent). 

Clearly, this doesn't fall under the safe harbor. BUT the 401k plan states that a hardship withdrawal may be allowed for "any other situations that, based on the facts and circumstances,  the Committee determines to constitute an immediate and heavy financial need."

Thoughts on whether this could be allowed under IRS regs?  I think main issue is whether this is a need of the Employee's, as required (or spouse/dependent/primary beneficiary).  If payment of funeral expenses for a "family member" can be considered a need of the Employee (as stated in regs), can that logic be extended here?  Cost to hire lawyer to keep "family member" out of jail could be considered a need of the Employee? (i.e. Father "needs" to keep adult child out of jail? has no expectation to repayment, etc.) 

Interested in what you all think...

We NEVER use anything other than the safe harbor hardship rules; anyone who designs plan language otherwise is not aware of the difficulties that entails, as can be shown here.

As for me, I can't see any situation where I would count this as a participant hardship as outlined above.  I would also amend the plan right after to make it the safe harbor rules.