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Safe Harbor Hardship Distributions Cannot Be Taken for Repayment of Student Loans

In Information Letter 2018-1, the IRS responded to a U.S. Congressman who asked why his constituent could not take a hardship distribution from his 401(k) plan to pay off his daughter’s college student loans. The IRS explained that a hardship distribution must be, among other things, be necessary to satisfy an immediate and heavy financial need. The Letter does not address the plan provisions applicable to the constituent but notes that under the safe harbor standards for hardship distributions in the Internal Revenue Code §401(k) regulations, education expenses are deemed a sufficiently immediate and heavy financial need if they are for the “payment of tuition, related educational fees, and room and board expenses, for up to the next 12 months of post-secondary education.”

The IRS confirmed in the Letter that because a safe harbor hardship distribution may be made only for the prospective payment of education expenses, it cannot be made for the repayment of student loans. The IRS suggested that as an alternative to taking a hardship distribution, the participant may be able to get a loan from the plan.

Note: 401(k) plans that permit non-safe harbor hardship distributions as described in the Internal Revenue Code §401(k) regulations could approve a participant’s hardship distribution request for the repayment of student loans, provided that the loan repayment constitutes an immediate and heavy financial need based on all the relevant facts and circumstances. Among other things, this includes the participant’s representation that the need cannot be relieved from other reasonably available resources such as insurance reimbursement, liquidation of the participant's assets, cessation of plan contributions, other currently available distributions such as ESOP dividends and nontaxable (at the time of the loan) plan loans, or borrowing from commercial sources.

As a reminder, the hardship distribution provisions will be changing in 2019, including the removal of the requirement in the safe harbor hardship distribution standards that a participant take all available plan loans to demonstrate financial necessity. In addition, the Treasury Secretary has been directed to remove from the safe harbor hardship distribution standards the requirement that the participant’s deferral contributions to all plans maintained by the employer must be suspended for six months following the withdrawal.

The Letter is available here.

©2018 Drinker Biddle & Reath LLP. All Rights Reserved

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About this Author

Karen E. Gelula, Retirement Plans Lawyer, Drinker Biddle
Counsel

Karen E. Gelula counsels public and private companies across industry sectors such as manufacturing, financial services, public utilities, energy, and health services, among others, on all types of employee benefits and executive compensation matters.

Karen has significant experience in the design, operation, compliance and governance of qualified retirement plans including 401(k) and profit-sharing plans, traditional defined benefit plans, cash balance pension plans, money purchase pension plans, and 403(b) plans. She also...

(215) 988-2729
Elizabeth Olson, Drinker, employment lawyer
Associate

Elizabeth “Betsy” A. Olson advises plan sponsors on the design and operation of qualified retirement plans and health and welfare plans to ensure compliance with ERISA and the Internal Revenue Code. Betsy has experience drafting and negotiating service provider contracts, preparing government filings, resolving pension and health plan claims, and correcting retirement plan qualification and operational failures under the IRS correction program. She also assists with Department of Labor audits, conducts employee benefit due diligence reviews, and drafts plan documents, summary plan descriptions, and employee communications.

Prior to joining Drinker Biddle, Betsy was an employee benefits associate at another Am Law 100 firm.

(310) 203-4038