401(k) Hardship Withdrawal

[BellaBee41]

Hello. We have an employee requesting a hardship withdrawal to prevent eviction/foreclosure of a mortgage on their primary residence. The documentation provided shows a mortgage statement under someone else’s name, however the address matches the participant’s ID and he considers it his primary residence. Not sure how the two are related, but perhaps it’s a relative or partner in which I assume he pays rent to (although there is not lease or rental agreement). My question is: can we approve this? 

Here is the safe harbor definition: “payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence.”

[Lou S.]

It would be up to the Plan Administrator but if they had sufficient evidence and believe that this is his primary residence (where his W-2 issued, his drivers licenses, a power company bill in his name, etc.) , I don't see why it would not be approved.

[Paul I]

Many of the plan administrators we have worked with also required proof of the threat of eviction.  This usually was in the form of a written notice from the landlord or bank explaining that they would act to have the tenant evicted unless the issues (typically delinquent payments) were resolved.

Fast forward to today's ability to rely on the participant's self-certification, and plan administrators' reluctance to press for information to corroborate the participant's request.

[Peter Gulia]

Avoiding unwelcome information about an employee’s living situation is among the reasons an employer/administrator might prefer that claims for a hardship distribution be processed from a self-certifying claim form.

[Ilene Ferenczy]

I think it's important to clarify:  if this guy is not an owner, then he is certifying to the fact that he is going to be evicted by his landlord and not that he is preventing foreclosure.   And, yes, you can rely on his self-certification unless the plan administrator has actual knowledge to the contrary.

 

Having said that, I'm just curious what you all would say about this concern:  If he is not the owner and he has paid his full rent, then why is he responsible for the money needed to prevent foreclosure?  In other words, if what he is going to do is to pay an expense of the owner, or if he is going to lend the owner money, is it really his hardship?  Is the fact that, if the property is foreclosed upon, he will likely get evicted enough to constitute a bona fide hardship cause?

[RatherBeGolfing]

34 minutes ago, Ilene Ferenczy said:

Having said that, I'm just curious what you all would say about this concern:  If he is not the owner and he has paid his full rent, then why is he responsible for the money needed to prevent foreclosure?  In other words, if what he is going to do is to pay an expense of the owner, or if he is going to lend the owner money, is it really his hardship?  Is the fact that, if the property is foreclosed upon, he will likely get evicted enough to constitute a bona fide hardship cause?

Could be a couple (married or unmarried) where only one partner is on the mortgage.  In that scenario, there probably would not be an agreement for rent, just shared expenses.  Without the distribution, they miss payments and are foreclosed on.  I think that's enough for a bone fide hardship.

[Paul I]

Setting self-certification aside, again many of the plan administrators we have worked with havew also required proof of the threat of eviction. They likely would not see the threat of foreclosure against the owner of the property as proof of a threat of eviction.  The foreclosure more likely would be viewed as a change in ownership of the property.

There many different twists to the scenario that may change likelihood of eviction, but the administrators would focus specifically on the threat of eviction of the participant. 

• If, for example, a bank foreclosed on the property, the bank may want to keep tenants who pay on time so be able to sell the property as a solid income-producing business. 
• The bank more likely would just not renew the lease, and that technically may not be seen as an eviction, but the cost of moving may be considered to justify a hardship withdrawal.

Are there statistics that show the what happens to existing tenants in the event of foreclosure on the building owner?  If yes, do they support the notion that upon the foreclosure, the tenants are exposed to a near-term threat of eviction?

 

 

[Peter Gulia]

A value of deciding claims using only a § 401(k)(14)(C) certification is that the plan’s administrator is removed—and its service provider too is removed—from discretionary decision-making about questions of the kind Ilene Ferenczy and Paul I describe.

Instead, a plan’s administrator designs (or approves its service provider’s design of) the claim form to state each of the available deemed hardships, and not ask for any supporting information. Likewise, a service provider designs the participant website’s software to not receive any information beyond the online claim form.

The claims procedure can be simplified (mostly) to approving a claim if the form is completed “in good order” and signed under penalties of perjury. Or NIGOing a form not filled-out or not signed.

But shouldn’t an employer that serves as its plan’s administrator (and service providers too) welcome a procedure that gets rid of discretionary decisions?

[Belgarath]

I simply cannot fathom why a PA would do anything BUT self-certification (barring additional unwelcome guidance on the subject in the future). With all the compliance/fiduciary responsibility issues that must be dealt with, the ability to offload an onerous compliance issue is a rare "win" for everyone involved, as far as I'm concerned. Will there be some fraudulent/BS "hardship" withdrawals by participants? Sure. But that's their problem.

[Paul I]

With the proliferation of new "qualified" distributions that are exempt from the 10% early withdrawal penalties, hardship withdrawals may in the not-too-distant future become dinosaurs. 

Unfortunately, it seems like each of the new "qualified" distributions has some quirk that needs to be tracked separately in case the participant repays the withdrawal. 

[RatherBeGolfing]

18 hours ago, Peter Gulia said:

But shouldn’t an employer that serves as its plan’s administrator (and service providers too) welcome a procedure that gets rid of discretionary decisions?

Yes, but I have seen people raise some legitimate issues.  @MoJo mentioned in an earlier thread that they had concerns with "actual knowledge to the contrary" and whether the employer's knowledge is imputed to a third party contracted to carry out functions like distribution approval.

[Peter Gulia]

The statute provides: “The Secretary may provide by regulations for exceptions to the rule of the preceding sentence [allowing the administrator to rely on the claimant’s certification] in cases where the plan administrator has actual knowledge to the contrary of the employee’s certification, and for procedures for addressing cases of employee misrepresentation.” Internal Revenue Code of 1986 (26 U.S.C.) § 401(k)(14)(C).

The Treasury department has not yet made, nor even proposed, such a rule or regulation.

Even if “actual knowledge to the contrary” becomes or is relevant, it is the administrator’s knowledge, which might not be the same as the employer’s knowledge. For example, if several organizations that comprise an IRC § 414(b)-(c)-(m)-(n)-(o) employer are a plan’s participating employers, the Plan Administrator (as specified in the documents governing the plan) might refer only to the one organization that is the plan sponsor. Further, that administrator does not necessarily know everything that any of the plan sponsor’s employees knows; rather, the administrator’s knowledge might be only that of the few people who work on administering the plan. (I’m mindful that the possibility of knowledge about an employee’s circumstances is greater with some small businesses.)

Consider further: If the plan’s records are the self-certification forms with nothing else, how would an IRS examiner collect evidence that the recordkeeper processed a hardship claim when the plan’s administrator then possessed “actual knowledge to the contrary”?

As I said last summer after MoJo’s observations: “Still, I hope recordkeepers will build a self-certifying method available to at least big-enough plans so they, with advice and thinking independent of the recordkeeper, can decide their resolutions of the policy and risk questions.”

https://benefitslink.com/boards/topic/70898-form-for-relying-on-a-participant%E2%80%99s-written-statement-that-she-has-a-hardship/#comment-332319

And for those who prefer to deter “leakage”, a sponsor/administrator might decide not to rely on certifications and instead evaluate the hardship claims.