I have a participant requesting a hardship distribution, but am having trouble determining if it qualifies. Plan does not permit loans, there are no other in-service withdrawals, and hardships are limited to elective deferrals. Plan uses safe-harbor standards for hardship.

His reason for taking the hardship is an upcoming surgery that will have him out of work for 3-4 months. However, the only thing he has on-hand to determine "immediate and heavy financial need" is his monthly mortgage and property tax statements, which don't qualify under safe-harbor standards.

His argument: "If I don't pay these, I'll get evicted or foreclosed." Is this a valid argument?

I would say no. Once he can provide you a copy of the medical bill, then he could qualify.

The problem as you know is that living expenses are not typically deductible medical expenses, so not eligible for hardship under that safe harbor provision. Better to go the "prevent eviction/foreclosure" route...

Many participants don't like to hear the following but it's actually about the best way to work this scenario.... he needs to not pay his mortgage on the next due date and then call his lender for a letter by fax stating he's now past due and must come current to avoid foreclosure (most lenders won't provide such a letter until after the due date, but will often do so during the grace period). The Service typically is fine w/ allowing the participant to receive the past due amount plus 2 months forward (plus gross up). The part would be 1 month past due plus 2 months forward which would give the 3 months being asked for.

As to the property taxes, they're a little tougher, typically have to let them go unpaid and wait for a letter from the tax authority which will typically refer to ultimate penalty of tax lien and/or seizure.

One thing to look at is does the plan allow more than one hardship per year... in which case the part could get the past due property tax as a separate w/drwl from the past due mortgage money. Also, if 3 months of mortgage ended up not being enough, then he could repeat the process after the months provided by the w/drwl had passed (he goes past due in Sept and gets $ for Sept, Oct and Nov; he could then go past due in Dec).

Participants don't like letting their bills go unpaid but they have to understand it's not a hardship in the IRS's eyes until they're actually past due. Remind him that his mortage likely has a 15-day grace period, during which time the payment is technically past due but not yet reported to the credit agencies.

Do you know of anywhere that this has been stated?

What happens if it is deemed invalid under audit?

I only have anecdotal evidence (the policy had been in place for years so I never had cause to research it). At my last employer, I went thru a full audit a couple years ago (three 401(k)s w/ $700M assets) and of the hardships they pulled (nearly every one we did that year), they only dinged us on how we did tax gross ups. I know for fact that a couple they looked at were to prevent eviction and had 2 months additional on them.

If you wanted to be safer and your plan allows for multiple hardship w/drwls in a year, you could do past due plus 1 month, or even provide only what is expressly required in the lender's delinquency notice to bring the mortgage current.

I'd think in audit where they'd start to question is if you did more that 1-2 months, because then it's harder to really claim the need is "immediate" (which is the term used in the regs) (for example, six months certainly isn't immediate).

Hopefully someone else knows where it might have been stated that 2 months additional is reasonable.

What great news for me personally that the immediate in "immediate and heavy financial need" includes a range of two months. Now when my daughter asks for some extra shoe money I can give it to her "immediately", or when my wife asks me when I'm going to mow the lawn I can tell her that I'll do it immediately.

Does anyone have any more information or reference to what constitutes immediate heavy financial need? In our office there a co-worker thinks he saw something written which states 90 days. I understand the defininition is not spelled out in the regs but we are looking for some sort of official interpretation.