Ongoing Hardship for expensive prescription not covered by insurance

Hello:  We have a client whose plan allows for hardships from 401k Deferrals and Safe Harbor sources using the safe harbor rules.  The participant is in a situation where his dependent needs to have a $2,000 prescription each month, and the medication is not covered under their insurance coverage.  The participant initially asked if it was possible to get a hardship to cover the cost of the medication for the next 3 years ($2,000 each month for the next 36 months).  My argument here is that he won't actually have proof of the hardship for a total of $72,000 - he'll only have a monthly bill for the medication.  Which leads me to him having to submit a hardship request each month to cover the cost of the medication.  Anyone have any other thoughts on this?  Suggestions?

1 hour ago, Pam S. said:

Hello:  We have a client whose plan allows for hardships from 401k Deferrals and Safe Harbor sources using the safe harbor rules.  The participant is in a situation where his dependent needs to have a $2,000 prescription each month, and the medication is not covered under their insurance coverage.  The participant initially asked if it was possible to get a hardship to cover the cost of the medication for the next 3 years ($2,000 each month for the next 36 months).  My argument here is that he won't actually have proof of the hardship for a total of $72,000 - he'll only have a monthly bill for the medication.  Which leads me to him having to submit a hardship request each month to cover the cost of the medication.  Anyone have any other thoughts on this?  Suggestions?

 

What are the plan provisions on hardships?  Some only allow one per year.  If there is no limit, then I would suggest they need to provide the information each month (it's for unreimbursed medical, and you don't know it's unreimbursed until the insurance company says so).  If the plan only allows one per year, it might be time to go to the bank and work out something like (if available) a home equity loan that they can use during the year and be reimbursed at the end of each year (and then pay the bank back each year).  Best I can come up with; maybe someone else has another idea.

The participant doesn't necessarily have to furnish proof of the expense to the plan administrator at the time the hardship is requested - the plan can rely on a summary substantiation.

There are plenty of other issues raised by allowing a hardship before the expense is actually incurred. For example:

• What if their insurance changes next year, and covers the drug?
• What if their doctor decides to change to a different drug?
• What if they get better?

While there is not, strictly speaking, a requirement that the participant incur the expense before the hardship withdrawal is made, if the participant ends up not having the expense after the plan already made a distribution, then there is a qualification problem.

Within the plan, if loans are available, then that might help get the participant at least part of the way.

Outside of the plan, as someone who's been in a similar situation in the past, I'd recommend that they call the drug manufacturer. Often they have programs where they will offer the drug at a discounted price and/or on a payment plan to people whose insurance doesn't cover it. Some states also offer a charity care program which this person might be eligible for.

15 minutes ago, C. B. Zeller said:

The participant doesn't necessarily have to furnish proof of the expense to the plan administrator at the time the hardship is requested - the plan can rely on a summary substantiation.

There are plenty of other issues raised by allowing a hardship before the expense is actually incurred. For example:

• What if their insurance changes next year, and covers the drug?
• What if their doctor decides to change to a different drug?
• What if they get better?

While there is not, strictly speaking, a requirement that the participant incur the expense before the hardship withdrawal is made, if the participant ends up not having the expense after the plan already made a distribution, then there is a qualification problem.

Within the plan, if loans are available, then that might help get the participant at least part of the way.

Outside of the plan, as someone who's been in a similar situation in the past, I'd recommend that they call the drug manufacturer. Often they have programs where they will offer the drug at a discounted price and/or on a payment plan to people whose insurance doesn't cover it. Some states also offer a charity care program which this person might be eligible for.

The summary substantiation appears to me to be a trap for the employer client, and thus, we do not ever talk about it.

Here is a good summary of those rules, and after reading, you might understand why we don't want to use that process.

https://www.shrm.org/resourcesandtools/legal-and-compliance/employment-law/pages/irs-hardship-withdrawals.aspx

As to the summary substantiation, this is what the IRS says is needed:

Given those two items, it seems that no reimbursement can be made until the cost is INCURRED and some amount is NOT COVERED by insurance, which to me can only be shown by the insurance company EOB which shows lack of coverage.  FWIW.

You'll find this in Exhibit 4.72.2-1 in  

• 401(k) plans – see
  • Internal Revenue Manual (IRM) Section 4.72.2.7.4.1 (09-05-2017), and
  • Exhibit 4.72.2-2, Attachment One Hardship Substantiation Information and Notifications for Summary of Source Documents

The standard for a deemed hardship is "Expenses for (or necessary to obtain) medical care that would be deductible under section 213(d)".

If an expense is "necessary to obtain" medical care then it follows that the financial need (and hence the withdrawal) precedes the actual provision of the medical care. So it seems to me that the reg at least contemplates, if not outright authorizes, withdrawals before the expense is actually incurred.

I agree it does carry some risk to the plan and a plan administrator would be well within their rights to limit the availability of hardship distributions where the expense is expected but not actually incurred yet.

Thank you for your responses.  Larry, just to answer your initial question back to me, the document does not limit the number of hardships a participant can take, so monthly would be an option.  This participant already has the maximum amount of loans they qualify for, so that's off the table.  We're working on an in-service withdrawal of any available amount prior to the hardship, and I guess we'll just take it from there.  I agree that circumstances can change at any time for this participant and I think the best way to handle this from a Plan perspective is to process the hardship each month (as requested) as long as the participant is still able to provide proper documentation.  Your feedback is welcome and appreciated!

Also, is there a way to get more than 1 month prescription at a time? Maybe 3 or 6 months, thus reducing the number of times he might have to submit?

Good point.