Hardship for purchase of principal residence

(2) Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments);

OK so this participant is using the money towards the purchase of principal residence.

The problem here is, he won't own the principal residence, his girlfriend will.

I have approved things like this before where it is to prevent eviction or foreclosure, where it is easy enough to establish that the person is in fact living somewhere.  But this is a new twist.

One thing I thought of is gift taxes being a possible issue here.  The distribution is about $25,000.

Thoughts? Has this ever come up for anyone else?? 

i thought something similar to this came up late last year in this forum and consensus was that this is OK because it will be the participant's principal residence - that is the deciding factor, not ultimate ownership.

While Federal gift tax and perhaps other gift and transfer taxes might be a concern for the person who gives his money to a non-spouse, is there anything about those taxes that might involve the plan or its administration?  Or is the thought just austin3515's strong intellect?

Ha!  I also began my career in public accounting so had some exposure there too!

Sorry, but no way would I ever be able to stretch the language to allow this as a hardship.  If you really think it is doable, then you need to request a ruling from the IRS to clarify, but barring that, it is NOT a purchase of his primary residence, it is effectively a rental payment to someone else and that is not a permissible hardship distribution. 

Anyone who advises a client that this is ok has no basis for such a decision (no regs, no cases, nothing but their own tortured reading of the law), and that's a good case of a malpractice claim.

FWIW.

If I were the IRS I certainly would have included the requirement that the participant's name be on the deed, but it ain't there.  I'm not saying I don;t agree with you but I don't think it is THAT black and white.  In fact a purely black and white reading would render it acceptable.  I'm stretching the regs to find it to be unacceptable.

If there is no relevant court decision and no relevant administrative-law document that supports approving the claim, there also might be none that supports denying the claim.

Cuse - yes, there was a discussion of this issue a while back - I'm sure you could find it with a search. Suffice it to say there was disagreement on the subject, as there is here. You pays your money and you takes your chances...

Here’s an earlier discussion:  https://benefitslink.com/boards/index.php?/topic/52446-personal-residence-hardship/&tab=comments#comment-227177

If the plan is ERISA-governed, a combination of ERISA § 404(a)(1)(A)-(B)-(D) exclusive-purpose, prudence, and obedience duties suggests a fiduciary ought to thoughtfully consider (while not causing the plan to pay or incur any more than “reasonable expenses”) the range of permissible interpretations to find one more likely than the others to be sound.

If the plan’s administrator denies the claim, it should follow its claims procedure and, if not already in that procedure, anything required under ERISA § 503.

Amazing how a different discussion 6 years ago can essentially have all of the same arguments on both sides!  I especially like this comment from Bird: 

Quote

Not only that but I think you have to think twice about what is "conservative" - it seems the assumption is that saying "no" is the safe or conservative position. But, since the regs don't specifically say the participant has to be purchaser, in saying "no" you appear to be denying a participant rights under the plan. I'm not so sure I want to be on that side

Extremely insightful!

22 hours ago, austin3515 said:

I have approved things like this before where it is to prevent eviction or foreclosure, where it is easy enough to establish that the person is in fact living somewhere.  But this is a new twist.

This is the more recent discussion I remember - allowing hardship to prevent eviction or foreclosure where the participant was a resident of the dwelling but not the owner or named on the lease. I don't think your current case is any different, except maybe some additional proof that the participant will indeed be living there. I would think the girlfriend would have to disclose this source in her mortgage application. 

Of course, if the participant's spouse has to sign off on this hardship distribution the whole transaction falls apart! 

Aha!  Good point!  I forgot to mention that :)

I haven't seen it mentioned, but 1.72(p)-1 Q&A 5 says " ... a principal residence has the same meaning as a principal residence under section 121."  Looking at 121, it refers to property that is  owned and used by the taxpayer as the taxpayer's principal residence. 

That is interesting but I'm not sure there is a link between the hardship rules and that definition.  The IRS is usually pretty good about saying "as defined in____" when the same definition applies.

I've had a few former girlfriends.  A few would deny it.

3 hours ago, austin3515 said:

That is interesting but I'm not sure there is a link between the hardship rules and that definition.  The IRS is usually pretty good about saying "as defined in____" when the same definition applies.

This could not be clearer in MY mind (but obviously not in everyone's).  No way is a distribution for purchasing a principal residence is the same as a distribution to give money to someone else with no legal restriction on how that money is used.  I will continue to say "no" without any pang of remorse or concern.  IF a client wants to challenge that, my recc is get a legal opinion from a solid ERISA attorney (doesn't mean it's right, but at least it's some justification) or request a ruling from IRS.