Does A Downpayment for a Rented Home Qualify As A Hardship?

[metsfan026]

We have a participant who is asking if this situation falls under a Hardship:

Due to a legal divorce, the participant has to move out of their house and needs a deposit for an apartment (first and last month's rent).  

It's not purchasing a primary residence, so I wasn't sure if this would apply.  Thanks in advance for your input!

[Peter Gulia]

Thoughts about other ways:

If the plan allows participant loans, might this participant prefer to borrow a needed amount, with an opportunity to repay over five years?

If the plan provides (or might be amended to provide) a § 72(t)(2)(I) emergency personal expense distribution, might that be a partial fit for the participant’s needs? A distribution can be “for purposes of meeting . . . immediate financial needs relating to necessary personal or family emergency expenses.” I.R.C. (26 U.S.C.) § 72(t)(2)(I)(iv). Practically, this distribution is almost standardless, especially if the plan provides it on a participant’s self-certifying claim. Although $1,000 might be much less than the participant needs, it might be better than nothing. I.R.C. (26 U.S.C.) § 72(t)(2)(I) https://www.govinfo.gov/content/pkg/USCODE-2023-title26/html/USCODE-2023-title26-subtitleA-chap1-subchapB-partII-sec72.htm.

This is not advice to anyone.

[EBP]

Safe harbor hardship reasons include:

(A)               costs directly related to the purchase of the principal residence for the participant (excluding mortgage payments) or

(B)              payments necessary to prevent the eviction of the participant from the participant’s principal residence or foreclosure on the mortgage on that residence.

A rent deposit is neither so does not qualify as a permitted hardship withdrawal under the safe harbor reasons. The inclusion of "mortage" in both of these reasons further supports the requirement that it be a purchase.

See Peter Guilia's post for alternatives.

 

[fmsinc]

EBP - can you give me a citation to the sourced of you safe harbor hardship reasons.  

Thanks.

David

[Peter Gulia]

Many plan sponsors design one’s plan to follow this:

26 C.F.R. § 1.401(k)-1(d)(3)(ii)(B) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(3)(ii)(B).

Of the seven situations deemed an immediate and heavy financial need, EBP’s paraphrases are of –(B)(2) and –(B)(4).

[Artie M]

Presumably the plan at issue utilizes the safe-harbor rules, as most do.  If so, the rest of this post is purely academic.  That said, a plan does not have to use the criteria set forth in Reg. Section 1.401(k)-1(d)(3)(iii)(B), cited above, for making hardship distributions.   For example, funds in a profit-sharing plan (obviously with a 401(k) feature) generally may distribute employer contributions under more lenient hardship rules where the "hardship" is sufficiently defined in the plan, is consistently applied, and limits the distribution to vested amounts.  See Rev. Rul. 71-224.  If the plan at issue does not utilize the safe-harbor rules you must scrutinize the plan definition of hardship and perhaps how the plan has historically administered hardships under these circumstances.