Loan for Hardship Reasons

[Megandps]

The loan policy states a loan may only be taken for a safe harbor hardship reason. What if the documentation of the financial need ($900 medical bill) is less than the loan minimum ($1,000)? 

 

[QDROphile]

Then the fiduciary administrator is required to interpret the plan. That effort will take more into account than is included in the post.  Based on the post only, my vote (which counts for nothing) is for no loan because the minimum is not satisfied. I could argue that a $1000 loan is allowed, and that would be a reasonable outcome, too.

[BG5150]

That provision only limits the REASON for a loan, not the AMOUNT.

Look at the maximum available loan section in the loan program and/or the SPD. It probably says minimum $1,000, max $50,00 or highest outstanding balance... It probably doesn't say the amount is limited to the hardship need.

So, to me, in theory, you could have a $40 medical bill and get a $50,000 loan.

[QDROphile]

And that is the first, and probably best, argument, for allowing the loan.  On the other hand, how much of the "hardship" concept is incorporated?  Does it include, by implication, incorporation, or otherwise, the limitation that the amount for hardship is only the amount to alleviate the hardship?  A broader inquiry into the plan language and related documentation, such as the SPD , is required.  Another point worth making is that generally the fiduciary is to make decisions in the best interests of the participants.   I would think that allowing a $1000 loan for a $900 medical bill is better than forcing a hardship distribution of $900, assuming that the participant is eligible for the hardship distribution.   However, allowing a $40 medical bill  to generate a $50,000 loan is a pretty hard stretch with respect to what may have been the intent of the settlor that chose the language to the extent the settlor really thought about it.  Being a fiduciary is not always easy, but in many cases the fiduciary is given a lot of latitude if the fiduciary proceeds with appropriate care and consideration in the decision.  This is one of them.

[AMDG]

Did the participant consider a gross-up for applicable taxes?

 

[Kirk Vaughn]

Depending on what your loan provisions say, the immediate financial need would be more than just the employee's portion of the bill. If the loan language mirrors the hardship regs, it might also allow include expenses tied to obtaining the care. For example, if the participant incurred some sort of an abnormal childcare expense while they were obtaining the care, if they had to pay for parking while at the provider, etc. all of that could reasonably be construed as necessary for obtaining the care and therefore part of the medical event.

[Larry Starr]

On 10/18/2019 at 11:47 AM, Megandps said:

The loan policy states a loan may only be taken for a safe harbor hardship reason. What if the documentation of the financial need ($900 medical bill) is less than the loan minimum ($1,000)? 

 

One of those situations where the answer is most likely "what does the plan say". Hopefully, the language is clear. IF the loans are only available for hardship, and IF the loan language says only FOR THE AMOUNT of the hardship and if the loan language has a $1,000 minimum (or no loan!) and the hardship is LESS than the minimum, then the language probably is read as NO LOAN in this case.  

[BG5150]

16 hours ago, AMDG said:

Did the participant consider a gross-up for applicable taxes?

 

There are no taxes on a Loan unless they default.  No 10% penalty either.

[BG5150]

14 hours ago, Larry Starr said:

One of those situations where the answer is most likely "what does the plan say". Hopefully, the language is clear. IF the loans are only available for hardship, and IF the loan language says only FOR THE AMOUNT of the hardship and if the loan language has a $1,000 minimum (or no loan!) and the hardship is LESS than the minimum, then the language probably is read as NO LOAN in this case.  

This is what our loan policy says with plans that use hardship reasons for loans.  Notice nothing in there about limiting the amount to only the need basis.

Type and Amount of Loan

If you are a Participant who is an Employee you may apply for a loan from the Plan for the purpose of enabling you to

meet an immediate and heavy financial hardship or an unusual or special situation in your financial affairs. Certain expenses are deemed to be

immediate and heavy, including: (1) certain medical expenses for the Employee, or you, your spouse, children or dependents; (2) costs relating to the

purchase of a principal residence (excluding mortgage payments); (3) tuition and related educational fees and expenses for up to the next 12 months

of post-secondary education for you, your spouse, children or dependents; (4) payments necessary to prevent eviction from, or foreclosure on, a

principal residence; (5) burial or funeral expenses for your parent, spouse children or dependents; and (6) certain expenses for the repair of damage to

your principal residence. Expenses for the purchase of a boat or television would generally not qualify for a hardship loan. Loans will only be made

to persons who the Plan Administrator determines have the ability to repay the loan.

 

Maximum Amount of Loan

A loan cannot be greater than 50% of the vested account balance under the Plan. Additionally, the loan cannot

exceed $50,000 minus the difference between the highest outstanding balance of loans in the past 12 months and the outstanding balance of loans

from the Plan on the date the loan is made.

[Larry Gagnon]

If the loan can only be taken for hardship reasons, the hardship need is $900 and the minimum loan is $1,000, then a loan of $1,000 is needed to meet the hardship.

 

 

[Larry Starr]

On 10/23/2019 at 1:49 PM, Larry Gagnon said:

If the loan can only be taken for hardship reasons, the hardship need is $900 and the minimum loan is $1,000, then a loan of $1,000 is needed to meet the hardship.

 

 

Larry, the question isn't what the participant needs, the question is what the plan language allows. If the language effectively says you can't have a hardship loan UNLESS the hardship is at least $1,000, then no loan is available.  That's why the prior answers say "what does the plan language say".  I'm frankly not sure what you are trying to say; that the plan HAS to make the loan of $1,000 if the hardship is only $900?  That can't be made as a simple statement because plan language may not allow that.

[Larry Starr]

On 10/22/2019 at 9:14 AM, BG5150 said:

This is what our loan policy says with plans that use hardship reasons for loans.  Notice nothing in there about limiting the amount to only the need basis.

 

 

And therefore, the question raised does not appear to be germain to your plan(s) due to your language, which is why we say RTFD! ?