Hardship withdrawals and constructive receipt doctrine

[t.haley]

Participant requests hardship withdrawal from 401k plan.  No question that request meets requirements for valid hardship withdrawal.  After check is issued participant changes his mind.  He has not received the check and has not cashed it.  Plan sponsor asked administrator to cancel the check and return funds to the plan.  Administrator says "okay - no problem" just need you to sign a hold harmless agreement.  In preliminary research I came across old posts here referencing informal IRS guidance that once the check is issued, the hardship withdrawal cannot be rescinded (based on the constructive receipt doctrine) and the funds may not be returned to the plan (because return of hardship withdrawal funds is not an eligible rollover into the plan)  Can anyone provide a cite or location of this informal guidance or other authority for telling the administrator they are wrong and the funds cannot be put back in the plan?

[bp parv]

The authority you are referring to is from a 2015 ASPAA annual conference Q&A with the IRS. The question involved a participant who had a valid home purchase hardship, received the money, and then the home purchase fell through. In that case, the IRS said that there was no mechanism to return the funds and as a result the participant had gross income through constructive receipt at the time of the distribution. 

But, those are not the facts here--the participant has yet to receive the money and it appears that the administrator can cancel the check. I don't know of any IRS guidance that says that the mere cutting of the check constitutes constructive reciept. In this case, I could argue that there is no constructive reciept:

Treas. Reg. § 1.451-2(a) provides that income is constructively received when it is credited to the taxpayer's account, set apart, or otherwise made available so that the taxpayer may draw upon it at any time. I would argue that if the participant has never received the check and cannot get the money because the administrator stops payment, the money is not yet available to him. Also, take a look at IRS Information Letter 2006-0045, the IRS explains that checks sent through the mail generally are income when the taxpayer actually receives them, unless the taxpayer had access to or control over the check earlier.

I don't think constructive receipt is a forgone conclusion here.

 

 

[t.haley]

bp parv - thanks for your reply - it was very helpful!  I have the same thoughts about constructive receipt not automatically applying just because a check has been issued.  I will take a look at the Information Letter you mentioned and the regulation.  I am also interested to hear the administrator's basis for concluding that the funds can be put back into the participant's account....

[David D]

The client may want to get some legal counsel on this.  I believe once the check has been written, you can not undo that.  Revenue Ruling 2025-15 confirmed that once a check is written the distribution occurred.  That re-iterated what an earlier RR said that simply not cashing a check does not undo the distribution.  I think IRS has also opined that as long as it can be confirmed the check was sent to the correct address, that is constructive receipt.  

[Pam Shoup]

If the "administrator" you are referring to is a Third Party Administrator/Recordkeeper and is NOT the Plan Administrator as named in the plan document, the TPA is acting at the direction of the Plan Administrator. The TPA has no responsibility or liability for ordering the money back into the plan. That is why they are asking for the hold harmless agreement.  If the action is incorrect, the TPA can point to the hold harmless agreement and note that they were performing ministerial duties on behalf of the Plan Administrator.