Ask the Experts November 8, 2022

What Kind of Payments Can a Hardship Request Cover When Buying a Home?

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

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We are a large health care provider that sponsors a 401(K) plan for our employees. I read your recent Ask the Experts column on the 401(k) rules for hardship distributions, which stated that one of the expense categories that constitutes an “immediate and heavy financial need” for hardship distribution purposes is “Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments)”. My question is: can a hardship request to cover costs directly related to the purchase of a principal residence for the employee include payoff of outstanding debts if that is what is required for the participant to qualify for the mortgage loan?

Kimberly Boberg, Taylor Costanzo, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

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Presuming that your 401(k) plan is satisfying the safe harbor method of determining what constitutes an “immediate and heavy financial need” for hardship distributions, and is including this particular expense as a category, probably not, though you should consult with retirement plan counsel on the specifics of this particular situation. The reason why it would probably not qualify is twofold.

  1. It is not a DIRECT expense of the purchase (satisfying debts unrelated to the residence in order to be able to qualify for a mortgage loan to purchase the residence is an indirect expense of purchasing the residence). Direct expenses of the principal residence generally include any cash down payment and any other cash due at closing, as opposed to cash due for other purposes related to home financing, such as mortgage payments or private mortgage insurance that is not due at the time of closing, as well as any other payments necessary for mortgage qualification.
  2. The hardship provisions as to what constitutes an “immediate and heavy financial need” are a safe harbor, meaning the plan sponsor is not required to follow them. As such, they are generally not intended to be interpreted broadly.

Of course, your plan can elect not to follow the safe harbor hardship withdrawal provisions and allow hardship distributions to be made for the reason you cited. However, upon audit, any determinations that you make with respect to hardship as a plan sponsor will be subject to a facts-and-circumstances review by the IRS, which is why many plan sponsors elect to utilize the safe harbor hardship provisions.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice. 

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Amy.Resnick@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future column.

Compliance November 7, 2022

ERISA Industry Committee Asks Federal Court To Consider Motion

The ERISA Industry Committee has joined an amicus brief, with the U.S. Chamber of Commerce, asking a federal appeals court to uphold the dismissal of a 401(k) lawsuit. 

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The ERISA Industry Committee has urged a federal appeals court to affirm a decision to dismiss fiduciary breach claims that were tossed out against a plan sponsor.

ERIC filed an amicus, or friend of the court, brief refuting fiduciary breach claims against the plan sponsor, Barrick Gold of North America, brought under the Employee Retirement Income Security Act.

“These complaints often rely on hindsight and inapt comparisons to argue that plan fiduciaries failed to meet their legal duties in selecting the funds that they offer,” stated James Gelfand, president of ERIC, in a press release. “It is critical that federal courts bring a swift conclusion to these claims and the detrimental costs they impose on benefit plans and participants.”

ERIC argued ERISA encourages the “creation of benefit plans by affording flexibility and discretion to plan sponsor and fiduciaries,” in the brief.

“This case is one of over 200 similar lawsuits brought in recent years against employer plan sponsors in nearly every industry and generating exorbitant legal costs,” wrote ERIC in the release.

The brief argues the plaintiffs “complaint relies on allegations that closely resemble those rejected as implausible in previous litigation controlling the applicable pleading standard here,” and contends “allowing hindsight-based challenges to discretionary fiduciary decisions to proceed would encourage the spread of similarly meritless and counterproductive lawsuits.”

Gelfand added, in the release, “ERIC remains committed to defeating the unsubstantiated legal claims that plan sponsors continue to face and defending employers’ ability to design and administer retirement benefits for tens of millions of Americans.”

The original lawsuit was brought in 2020 before the United States District Court for the District of Utah.

The plaintiffs argued in the complaint that the plan failed to capitalize on its substantial bargaining power — because of the amount of assets in the plan — to negotiate lower plan fees and expenses.

A judgement was entered in favor of the defendants and the case was dismissed, with prejudice, earlier this year, court documents show. The plaintiffs have appealed the decision.

ERIC joined the amicus brief as a filer along with the U.S. Chamber of Commerce and American Benefits Council. Such briefs are filed by organizations that are not party to them for several reasons, including in this case, where third parties with a special interests or expertise in a case seek to influence the decision of the court. ERIC is a Washington, D.C.-based nonprofit that represents large employers that sponsor health and retirement plans.

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