hardship distribution question

A participant has an expense that is due immediately that would qualify under a safe harbor hardship distribution.

Since payment is due, like, right now and they pay it with a credit card, can they use a hardship distribution to reimburse themselves for that cost?

If the participant yesterday or today charged an expense on her credit card, she might have not yet paid the lender for that expense.

Consider whether circumstances of that kind might mean the participant still has a need 26 C.F.R. § 1.401(k)-1(d)(3) describes.

Here's a situation (not the current situation I have):

Participant's spouse dies.  Funeral parlor needs $5,000 deposit today.  Does She have to keep the body in the funeral home (probably incurring additional expenses), wait a week or so to apply for a hardship, then write a check to the funeral home?

Costs for funerals/burials come fast and furious.  Some fund houses have a 3-5 business day turnaround.  And nevermind if this is a brokerage account plan.  It could take two weeks for money to be available.

(And add to the fact pattern, the plan allows for hardships for the IRS safe harbor reasons only; it's not fact & circumstances.)

IMHO, if the plan accepts self-certification, where's the problem? As a Plan Administrator, I'd accept the self-certification with no questions asked. There might ultimately be some repercussions to the participant if the IRS audits and finds the "hardship" was pure BS, but not the plan's problem.

About how quickly or slowly an investment or service provider processes and pays on an instruction is up to the plan’s procedures and service arrangements.

That even a next-day distribution might not be quick enough could be among the reasons someone uses a credit card, and hopes the retirement plan’s check arrives in time to pay off the credit-card charge.

About awkwardness in deciding what is or isn’t a hardship, wouldn’t many questions vanish if the plan’s administrator relies on the claimant’s certification as Internal Revenue Code § 401(k)(14)(C) permits?

This type of situation is the part of the motivation for the SECURE 2.0 self-certification provision removing requirement to submit documentation.  The SECURE 2.0 provision is optional and can be effective on or after 12/29/2022.  The plan sponsor or administrator should at least be able to document the decision to use the new rules and communicate them to participants, and also inform the participants that they need to retain the documentation in case the IRS asks for it.

Back to this situation, funeral expenses are a safe harbor reason, the immediacy is readily apparent, so the remaining issue is documenting the financial need that cannot be met by the participant from other sources.  I wonder how tough the IRS would be under these circumstances.

tacking on to the funeral example:

What say all you wonderful people?

Facts: Funeral was 12/1/2022

Funeral expenses were paid via check (don't know who) on 12/19/2022

Participant is presenting now (two weeks ago, early May 2023) request for hardship. 

I know its facts and circumstances -

Some possible analysis:

1. Its within 12 months so its okay to approve?

2. it was paid in cash so the credit card example doesn't apply, and since they were able to come up with the cash, there is no financial need and it should be denied?

3. Even if the participant gave a self-certification that the plan would typically accept (if following the update in SECURE 2.0) the plan admin has actual knowledge (see item 2) that there is no immediate and heavy need, so it should be denied

4. If the participant gives the full self-certification under SECURE 2.0 the plan admin should just call it good and approve

5. Something else? 

Under the circumstances for the funeral expenses, there does not seem to have been an immediate and heavy financial need for which the participant had no other financial resources, and the PA has actual knowledge of the facts.  I suggest the PA should deny the hardship, but that is the PA's decision.

If the PA relies on self-certification and perchance the participant is asked by an IRS agent to prove the payment qualified as a hardship withdrawal, the participant likely will claim as part of their response to the agent that the PA approved the payment.

We are in the process of thinking about changing our rubric to consider credit card payments for otherwise hardship available expenses.  However, we are considering a much smaller window.  Maybe 2  months after the payment was made.  This way, the participant will have received at least one credit card statement.  The 12 months suggested above, to me is way too much time.

That said, we do not think that payment by check would suffice.