When is an Eviction a Hardship?
Learn more about the safe harbor definition of eviction for hardship distribution purposes.
Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in California is representative of a common question on what constitutes an eviction for hardship distribution purposes.
“The rental house that a client is living in has been sold, and the client has 30 days to move out. The plan follows the safe harbor definition of hardship. Does this qualify as an eviction for hardship distribution purposes?”
Highlights of the discussion
In this case, since receipt of a hardship payment would not prevent eviction, the situation does not meet the safe harbor definition of hardship. If the plan included non-safe-harbor language for hardship distributions, the answer would depend on the specific language in the plan document.
As a refresher, hardship withdrawals from a 401(k) plan are permitted if 1) a plan participant has an immediate and heavy financial need; and 2) a distribution is necessary to satisfy the participant’s financial need.
Several safe harbor events entitle a plan participant to take a hardship distribution from their 401(k) plan account, including an eviction. The question often arises as to what constitutes an eviction.
The safe harbor for eviction states that it is for “payments necessary to prevent the eviction of the employee from his or her principal residence or to avoid foreclosure on the mortgage on that residence” (Treas. Reg. §1.401(k)-1(d)(3)(iii)(B)(4) page 312).
Unfortunately, the situation described by the advisor would not constitute an eviction under this definition. While it is true that the participant may be experiencing an immediate and heavy financial need related to the notice that they have to move out of the house within 30 days, the hardship distribution from the plan would not quell that hardship because no amount of money would “prevent” the participant from having to move out of the house since it was sold and is no longer going to be rental property.
Conclusion
For plans based on the safe harbor language for hardship distributions, it is important to understand how hardship events are defined to ensure that the plan does not permit distributions for an immediate and heavy financial need that do not satisfy the safe harbor definition of a hardship.
