Hardship Dist Eligibility (sad case)

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

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.

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?  

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

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.

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).

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)