plan loans for family members

[Guest sheadan]

Can a Plan make a loan to a participant to help his/her child purchase a home? I guess similiar to tuition clause in many documents

[Guest RNorris]

Unless your document specifies that loans can only be made in the event of a safe-harbor hardship, the participant can take the loan for any reason. If this is the case, however, assisting a child with the purchase of a home would not qualify as a reason to extend the term of repayment beyond the 5-year limit under IRC Section 72(p)(2)(B).

[AndyH]

This of course presumes that the sponsor is not an S-Corp, sole proprietor, or partnership (with the participant being the owner or partner) and also that the plan document permits loans.

[Guest sheadan]

We limited loans in the document to only for "principal residence". This is a rank and file ee, hardship is available but drawback is no 401 k for one year! Term may not be an issue as amount is only 5-7K

[KIP KRAUS]

I don’t see how this employee would qualify for a hardship withdrawal to help a child purchase a house. I wouldn’t accept that as a qualifying hardship in our plan. Even if he/she is eligible, the main draw back to the withdrawal is the 10% tax penalty and payment of regular taxes. If a loan can be taken it would be the best way to go.

[Guest RNorris]

I agree that this is not a qualifying hardship event. Reg. Section 1.401(k)-1(d)(2)(iv)(A) specifically says that the residence must be for the participant.

If your document limits loans to the "purchase of a principal residence," does it also specify that the residence be for the participant?