Hardship Distribution - Medical Expenses

[Guest Karen Geiger]

We have a plan participant who wants to take a hardship distribution due to medical expenses that were incurred this year. This is allowed under the terms of the plan. The problem, however, is that he has already paid for a portion of the medical bill. He would like to take a distribution that covers the entire amount. Can we pay him the entire amount or only the amount that he has not already paid for?

I have been unable to find anything that says one way or the other whether you can reimburse expenses that have already been paid.

[Guest Rudy]

Hardship withdrawals are available to satisfy a heavy and immediate financial need when NO other resources are available to meet that need (see 1.401k-1(d)(2)). Therefore, the participant cannot be reimbursed for expenses that have already been paid.

This situation happens on occasion in our shop. Usually the participant has paid the bills with a credit card, and wishes to be reimbursed. Unfortunately, another resource (credit card) was there to meet the need and the request for reimbursement due to hardship is denied.

Hope this helps.

[Guest Karen Geiger]

Thanks for your response. In this case, however, the plan uses the deemed hardship distribution standards. Under 1.401(k)-1(d)(2)(iv)(B)(2), the employee only has to have taken all loans available under all plans maintained by the employer. It does not reference other assets available to the employee.

[actuarysmith]

I would respectfully disagree with the other response and grant the hardship. If you are using the IRS safe harbor definitions and your hardship withdrawal form asks the participant to certify that they are using it to pay medical expenses (with a signature and date) I would think that you could grant the request.

To be safe, I would probably request that a copy of the original unpaid medical bill be attached. After that, I don't believe it would be your "problem".

The fact that 1/2 of the h/s was already paid by a credit card seems irrelevant.All that did was transfer his obligation to pay one entity to a different entity.

If you are using the IRS safe harbor definitions, this should insulate the TPA or sponsor from having discretion or having to act like a bank or lending agency (i.e. and be concerned about what other financial resources a participant has available).

[Guest DDDlump]

For hardship distribution for medical purposes, is this for immediate family members only or can it extend to paying medical expenses for an elderly, dependent parent?

[R. Butler]

DDD lump--If the individual for which the medical expenses are paid is a dependent on the participant's tax return you should be O.K.

I would also disagree with actuarysmith that the fact the participant has paid with a credit card is irrelevant. Reg. 1.401(k)-1(d)(2)(iii)(B) actually contemplates participants borrowing from commercial sources prior to obtaining a hardship withdrawal. If it is reasonable for the participant to obtain the money from a commercial source, the participant must do so. The key is whether or not it is reasonable. The fact that the participant has already paid the bill leads me to agree with Rudy.

[actuarysmith]

I read the reg mentioned by R. Butler.

I guess the participant made the "mistake" of telling you that they had already paid a portion of the bill with a credit card. (I don't want anyone to take this the wrong way - the reg says "... if the employer relies upon the employee's written representation, unless the employer has actual knowledge to the contrary...")

Since this participant told you that he had already paid part of the bill, you have actual knowledge to the contrary.

The participant volunteered extra information that probably now requires you to act differently on the matter than had they kept to themselves..

It seems that the prudent thing to do now would be to only issue a distribution equal to the remainder of the medical bill.

However, I still don't feel that a participant is obligated to pay an item with a credit card. I don't consider an interest rate in the range of 18%+ (as charged by most credit card companies), as reasonable.

Had this participant come to you first (before paying the bill) and told you they were willing sign a statement that the need could not be reasonably met from other sources, you would need to honor that and make the distribution for the full amount. (Or possibly, even if he had already paid the bill, but didn't choose to volunteer that information to you).

I would like to thank Mr. Butler for directing my attention to the specific regulation. It was educational to read it again and I guess that's one of the purposes of these bulleton boards - to learn something...........

[Guest Karen Geiger]

Thanks for everyone's responses. I do not, however, think that 1.401(k)-1(d)(2)(iii)(B), which requires a participant to relieve his hardship through other means, if reasonable, prior to obtaining a hardship distribution, applies in a case where the Plan requires the participant to satisfy the deemed hardship distribution standards. Do you agree or disagree with this position??

Also, I have no idea how the plan participant paid for his medical expenses (e.g. by credit card or cash).

[R. Butler]

If you are relying on the safe harbor I wouldn't reimburse for expenses that have already been paid. My reasoning is twofold: hardship withdrawals are only available if there is an immediate need for one of the specified expenses. If the expense has already been paid then there is not an immediate need for the specified expense. Secondly, if you reimburse you are heading down a slippery slope. Where do you draw the line? Do you give a hardship withdrawal for expenses that occurred 3 months ago? 6 months ago? one year?

I would agree with actuarysmith that alternatives means of payment must be reasonable. If the participant hadn't already paid the hardship withdrawal may be an alternative, but not after the expenses have been paid.