401k Hardship withdrawl for purchase of primary residence

[Watson]

A participant needing a 401k withdrawl for purchase of a primary residence.  Do the administrators of the plan contact the lending institution?  In addition if work needs to be done to the residence being purchased i.e. new roof, can that be sent in as construction costs? 

[401king]

Administrators should not need to contact the lender; the participant providing an executed purchase contract should be sufficient. 

Repairs required due to unexpected damage are eligible; but, replacing an old roof because of wear & tear isn't. 

[Watson]

They have asked for a Good Faith estimate, in addition to the purchase agreement.  Will an email from the lender outlining the cost of the loan suffice?  

[fmsinc]

Here are the IRS rules re: hardship withdrawals.

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

  I have never heard of any Plan allowing a hardship withdrawal to purchase a principal residence. .  

[Doc Ument]

That IRS webpage is NOT saying that a participant cannot receive a hardship distribution for the purchase of a residence, but is saying only that the plan must specify which events qualify and which do not, and gives an example of a plan that chooses to permits only two "safe harbor" hardship events described in the regulation (medical and funeral expenses)  but prohibits another one of those regulatory "safe harbor" hardship events, namely, the purchase of a principal residence. Quote: "Thus, for example, a plan may provide that a distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and education expenses. " 

In fact, that IRS webpage is defective in that it does not acknowledge that under (current) regulations, an employer may choose to bypass the "safe harbor" hardship events altogether, and  use instead a "facts and circumstances" method for determining if a hardship has occurred.   Of course, the regulation is changing, presumably in 2019, to take into account recent statutory changes that will render the distinction between the safe harbor method and the facts-and-circumstances method obsolete starting no later than January 1, 2020.

The fact that a plan may currently choose (as noted on the IRS webpage) to not allow a hardship for the purchase of a principle residence does not mean that a plan is prohibited from doing so, especially since Regulation 1.401(k)-1(c)(3) lists the purchase of a principle residence of the employee as a "safe harbor" event for granting a hardship distribution request.  It is the second item on that list of safe harbor hardship events, following the event for medical expenses.

The regulatory safe harbor event for the purchase of a principal residence even goes so far as to state "excluding mortgage payments."   That means that although a plan MAY provide hardship provisions for the purchase of a principal residence, a plan relying on the safe harbor event may NOT provide a hardship distribution for mortgage payments, i.e., the funds must be applied directly to the purchase of the residence.  That means the administrator has no reason to contact any lender when granting a hardship for the purchase of a residence because the only factual issues to be resolved are (1) Is a residence being purchased, and (2) if so, how will the residence be used?   A hardship event may be declared even if there is no loan (e.g., mortgage) and therefore no lender.

Most employers adopting the "safe harbor" events tend to select all of those events, which would therefore include the purchase of a principal residence.   Some preapproved plans bunch them all together, which would necessarily include the hardship event of the purchase of a principle residence.  The IRS page is giving an example where an employer has selected some, but not all, of the available safe harbor hardship events, and should state that this is applicable for only plans using the safe harbor method for determining hardship events.

At one time, the regulation was more liberal, as I tend to recall it once allowed even the purchase of a vacation home, but was revised quite some time ago to limit it to only the principal residence of the employee.