Safe Harbor Distributions: What Constitutes an “Immediate and Heavy Need”?

Employee Benefit Plan Audit | February 17, 2017 | Holtzman Partners

In most cases, participants’ immediate and heavy financial need must be established based on “all relevant facts and circumstances” before they are eligible to request a hardship distribution.

Yet, the IRS has established safe harbor rules that automatically consider an employee to have such a need if the distribution is used to cover any of the following:

  • Medical care expenses for the employee, the employee’s spouse, dependents or beneficiary
  • Costs directly related to the purchase of an employee’s principal residence (excluding mortgage payments)
  • Tuition, related educational fees, and room and board expenses for the next 12 months of post-secondary education for the employee or the employee’s spouse, children, dependents or beneficiary
  • Payments necessary to prevent eviction or foreclosure on the mortgage of the participant’s principal residence
  • Funeral expenses for the employee or the employee’s spouse, children, dependents or beneficiary
  • Expenses for the repair of damage to the participant’s principal residence that would qualify for the casualty deduction under the Internal Revenue Code

General Rules

The General Rules for hardship distributions give plan sponsors some flexibility to allow distributions based on the facts and circumstances of the employee, and are not listed in the safe harbor rules. Under these general rules, a hardship distribution requires that the participant could not have reasonably obtained the funds from another source.

These other sources may include insurance or other reimbursement, liquidation of the employee’s assets, the employee’s pay, or the discontinuation of elective deferrals and after-tax employee contributions.

Take It at Face Value

Unless the employer has actual knowledge to the contrary, the employer may rely on the employee’s written statement that his or her need can’t be relieved from other available resources. Note that a plan participant does not have to use alternative resources if doing so would increase the amount of the need. For example, an employee requesting a hardship to purchase a principal residence doesn’t have to obtain a plan loan if the loan would disqualify the employee from obtaining other necessary financing.

Regularly review your plan documents and plan loan procedures to ensure that the plan terms and loan requirements are being followed.

 If you have additional questions about safe harbor regulations, please contact a member of our Employee Benefit Plan Audit team at 512.610.7200 to discuss further.

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