Hardship Withdrawal for Overdue Student Loan Repayments?

Our plan document uses the IRS safe-harbor rules for hardship withdrawals.  Am I correct that overdue student loan repayments do not count as approved reasons for hardship withdrawals?  I don't want to deny the request until I am sure.

• Tuition, related educational fees and room and board expenses for the next 12 months of postsecondary education for the employee or the employee’s spouse, children, dependents or beneficiary. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-hardship-distributions

If the plan does not yet provide that claims for a hardship distribution are decided by the participant’s self-certification:

That the worker missed a student loan repayment suggests she might have used money she budgeted for that purpose on something else. If so, the something else might fit a hardship condition.

This is not advice to anyone.

Let's assume as Peter notes that participant self-certification is not available.

Generally, taking a hardship withdrawal to make loan repayments such as for delinquent mortgages (with the threat of eviction) financially does more harm than good.  The withdrawal is taxable and often triggers the early distribution excise tax.  Student loan provider haves many alternatives available to help individuals who have difficulty making loan repayments.  It would be in the better interests of the participant to encourage them to pursue those alternatives before tapping into the plan.

Student loans commonly are written for expenses for an upcoming academic year.  It is not uncommon for an individual to have multiple loans that may be consolidated later.  An administrator who is parsing the safe harbor language could conclude that a student loan repayment on a loan for a prior academic year does not meet the requirement that the hardship is for an expense associated with the next 12 months of expenses.

It also is notable that paying off credit card debt by itself is not a safe harbor hardship reason, but having sufficient available credit on a credit card to cover a heavy and immediate financial need is a reason to deny a hardship.  This quirk merely highlights that the safe harbor hardships are not intended to be a universal solutions for relieving debt.

Consider that some lawyers who work with employee-benefits law or employment law advise an employer/administrator that it can be unwise and harmful to receive too much information about an employee. While outlooks vary, understanding why and how that can matter might influence an employer/administrator’s design of a claims procedure, and might influence whether one tries to help an employee (for example, by suggesting ways to improve her claim, or inviting one to reconsider a claim), or eschews getting involved.

Before the 1986 Act, the extra income tax on a before-59½ payout was the regulator of whether the participant needs or wants a payout.

Instead of making an employer/administrator or its service provider a judge of the participant’s circumstances, perhaps some might ask Congress for the simpler ways.

5 hours ago, Peter Gulia said:

Instead of making an employer/administrator or its service provider a judge of the participant’s circumstances, perhaps some might ask Congress for the simpler ways.

Isn't that what self certification does?

Yes, self-certification removes an employer/administrator from judging a participant’s circumstances. That’s why I like it.

But I suggest also repealing—for § 401(k), § 403(b), and governmental § 457(b)—the tax law restraints against a distribution before severance-from-employment or age 59½.

Yet, not everything that happens in life calls for an exception from the § 72(t) tax on an early distribution.

But I didn’t overcome, or even attempt, the rigors of being elected to Congress.

When these self-certification plans get audited by the IRS in a few years, will they be looking for proof?

Who gets in trouble if someone self-certifies a hardship that has nothing to do with one the safe harbor rules?  (I need a new car.  Not safe harbor reason.  But, participant my reason it thusly:  I need a new car to get to my job.  Without my job, I can't pay my rent and I'll get kicked out.)

Will there be a steep penalty tax on the participant if they mis-interpret the rules and they get caught?

How does it affect the plan?  How so, then?

I’ve learned that some practitioners worry that some IRS examiners won’t follow the law.

But if the IRS (including raising an issue to an examiner’s supervisor, and if that doesn’t work getting Chief Counsel advice) follows the law, the IRS would not assert that a plan is tax-disqualified because the plan allowed a distribution when the plan’s hardship standard was not met unless the evidence shows “the plan administrator ha[d] actual knowledge to the contrary of the employee’s certification[.]”

Internal Revenue Code § 401(k)(14)(C) https://uscode.house.gov/view.xhtml?req=(title:26%20section:401%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section401)&f=treesort&edition=prelim&num=0&jumpTo=true.

If a plan’s sponsor or administrator adopts a self-certification claims procedure, one might design the form and procedure not to ask for any unnecessary information. And if one receives extra information, to act on it.

I’m aware that plan sponsors and practitioners have a diversity of views about whether to provide self-certification for hardship claims.