Hardship Dist Eligibility (sad case)

[Basically]

A young plan participant wanted to take a loan from the plan.  Unfortunately, the plan does not allow loans.  He then asked if he could take a hardship dist.  Yesterday I spoke to my contact at the business who explained the situation.  This mid 30s guy was raised by his grandparents.  His grandfather has since passed and now it is just he and his grandmother.  Sadly, she has dementia (giving away her monthly SS check $, must be with someone 24/7).  This young participant is in the process of legally obtaining conservatorship but as it stands right now, she is not his dependent.   Does that matter?  There certainly is a paper trail of him caring for  her.  Anyone see an issue here allowing a hardship dist?

Thanks

[Peter Gulia]

What amount does the participant seek?  What expense does the participant claim as his (perhaps including his grandmother's) hardship need?

A conservatorship by itself might not make the incapacitated person the conservator's dependent.

If the plan provides the Treasury regulations' deemed hardship needs, some of them might apply regarding the participant's primary beneficiary's expenses.

This is not advice to anyone.

[Basically]

My understanding is that he is looking to take a $6,000 distribution to cover legal expenses.  He has already upgraded her furnace and other necessary repairs on her residence out of his own pocket.  

Should he present the plan trustee with an estimate for the legal fees?  

 

[Peter Gulia]

Is the grandmother's residence also the participant's principal residence?

[Basically]

Yes... she has transferred ownership to him.  She was aware that it needed to be done prior to her totally being unable to do so... mentally  In fact, he is due to be married this summer and his wife-to-be is onboard that he and Grandma are a package deal.

[Peter Gulia]

If the participant not only owns it but also lives in it as his principal residence:

If the plan provides this hardship need, the participant might consider:

“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).

[Artie M]

If he already paid for the furnace repairs etc. then there is no immediate and heavy financial need.  The hardship rule @Peter Gulia cites is intended to cover an existing need to repair.  Here, the need is for a reimbursement.  It would be different if these were unpaid repair invoices.  Without that, approving a hardship solely because the participant previously spent money on repairs and now has cash-flow issues could be difficult to square with the “immediate and heavy” requirement even if the company is sympathetic to the participant's needs.  Now, if the plan doesn't use the safe-harbor rules and the administrator can reasonably conclude it still meets the general "immediate and heavy financial need" standing, it might be possible.

The other thing they might consider would be if she has any eligible medical expenses.  Though she is not a dependent--I don't advise this but it is a technical possibility--he could name her as his primary beneficiary under the plan.   See http://https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(3)(ii)(B)(1)

[Peter Gulia]

Artie M.’s explanation that an expense already paid might no longer be an immediate need likely is a mainstream interpretation of a plan’s provision that follows the Treasury’s rule.

But some deciders of hardship claims are not so strict. Some reason an employee might have paid a recognized expense without foreseeing how it would affect the employee’s ability to meet other expenses. A financial controller thinks about which expense to pay in what order, including considering expenses to be paid from particular budgets. Many working people don’t think that way, and some administrators reason they shouldn’t be expected to. An ordinary person might pay an emergency expense using money that normally would go to recurring expenses, letting some go past due while waiting for an insurance recovery or a hardship reimbursement.

I’ve seen claims procedures under which an expense already paid is recognized for a hardship if it was paid in a recent few months. Some of those procedures were designed by lawyers who knew one’s client’s procedure is certain to be examined by the Internal Revenue Service.

A fiduciary designing a claims procedure might balance a need to be reasonably confident that decisions on hardship claims do not tax-disqualify the plan with being reasonably responsive to participants’ claims for a hardship that meets the plan’s provision. A fiduciary that otherwise would lack expertise should want its lawyer’s advice.

This is not advice to anyone.

[Artie M]

Not sure if I have ever been called "mainstream".  I would say I can be overly conservative at times.  Granted some of this goes (way) back to one of my first IRS audits where the client was berated--no penalties but was told don't do it again--for paying a participant's legitimate medical expense but the substantiation provided to the auditor was the participant's master card receipt from the emergency room.  The IRS agent said this was not payment for a medical expense but was payment for credit card debt.  I think it was harsh but the client changed its procedures as this was an old school "resident agent" for a very large corporation where the audit examination process was essentially continuous.  I have also had internal auditors sample some of the documents and come back with similar issues.  Perhaps it is battered-lawyer syndrome but I "shy away" from these issues when I can.

[david rigby]

I'm not sure this young man has considered other alternatives.  If available, he should discuss the situation with a local Senior Services agency, maybe also with an elder-law attorney.