401k hardship request - Casualty Deduction

[Santo Gold]

I struggle with understanding the Casualty deduction reason for hardship withdrawals.  I am not sure if it applies in this case and am asking for any opinions or interpretations.

A bad storm blew through and damaged the roof of a 401k participant's house.  Not a federal disaster area and it was his principal residence.  The insurance will pay for the repairs but he has a $1000 deductible which he does not have.  Can her receive this from the 401k plan under the Casualty deduction reason?

Thank you

[Peter Gulia]

If the plan provides such a deemed need:

“A distribution is deemed to be made on account of an immediate and heavy financial need of the employee if the distribution is for— Expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under [Internal Revenue Code] section 165 (determined without regard to section 165(h)(5) and whether the loss exceeds 10% of adjusted gross income)[.]” 26 C.F.R. § 1.401(k)-1(d)(3)(ii)(B)(6) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(3)(ii)(B)(6).

Next, a plan’s administrator might evaluate whether the claimed distribution “is not in excess of the amount required to satisfy the financial need (including any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution).” 26 C.F.R. § 1.401(k)-1(d)(3)(iii)(A) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(3)(iii)(A).

Also, the plan’s administrator might consider whether the plan “provide[s] that, before a hardship distribution may be made, an employee must obtain all nontaxable loans (determined at the time a loan is made) available under the plan and all other plans maintained by the employer.” 26 C.F.R. § 1.401(k)-1(d)(3)(iii)(C) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(3)(iii)(C).

If the plan does not impose a condition of taking a participant loan first, an administrator might consider approving an amount that follows an uninsured loss (for example, a $1,000 retention or deductible) and a gross-up for income taxes, including, if applicable and not excepted, each extra income tax on a too-early distribution.

This is not advice to anyone.

[ratherbereading]

I think yes.  See below from DWC- the 401k Experts (their wording, not mine):