Financial Emergency! It is unpredictable yet it happens to all of us. Whether
it's college tuition for your daughter, unexpected medical bills from an
accident in the yard, covering the higher than expected closing costs on your
new home or avoiding foreclosure or eviction because spending got out of hand;
you're going to need money fast.
As one of the requirements for the tax exempt status of your Solo 401k,
distributions of funds from your Solo 401k are limited to termination of
employment, retirement, disability, death, plan termination or inservice
distributions after age 59.5. Severe options for those needing a temporary cash
infusion.
Your Solo 401k to the Rescue.
To cover those immediate situations, the IRS allows Solo 401k's to provide
two sources of funds: Number one is a loan of up to the lesser of $50,000 or
one-half of your vested account balance. Number two is the hardship disbursement
of salary deferral contributions for financial hardships.
Loans from your retirement account must meet the provisions of section 72(p)
which requires that the: ü Loan satisfies the five year repayment term
requirement (15 years for residential loans). ü Loan satisfies the level
amortization schedule of consistent repayments.
Loan satisfies the enforceable promissory note contract agreement
requirement, and ü Loan satisfies the amount limitations of the lesser of
$50,000 or one-half the vested account balance.
Loans are optional features of a Solo 401k plan and should a plan sponsor
decide not to provide for loans because of the additional administrative
complexity and cost, there remains the safe harbor Financial Hardship
provisions. So called because limiting financial hardship requests to only
preapproved IRS conditions eliminates the requirement to justify the decision to
approve or disapprove the request based on facts and circumstances.
These financial hardships must satisfy one of the following IRS preapproved
conditions: ü Medical bills unreimbursed by insurance ü Secondary Education for
yourself, spouse or dependents ü Purchase of your primary residence or ü Avoid
foreclosure or eviction
These hardship disbursements are not considered Solo 401k distributions with
the option to be rolled over to IRAs or other qualified plans. But what happens
if the solo 401k financial hardship does not meet one of these criteria? The
request is denied and the consequences must be endured.
The IRS recognized that there were other significant events that could
qualify as financial hardship and with IRS Regulation 2004-TD-9169, the IRS
added two additional circumstances to the list of approved financial hardships.
1.Funeral Expenses and 2.Cost of Uninsured Repairs on your Primary Residence.
These two new additions bring the approved circumstances to a total of six.
The changes to the safe harbor hardship rules resulting from the IRS regulations
is the second set of changes to the hardship rules since GUST.
The first set of
changes occurred when EGTRRA reduced the holdout period for elective deferrals
from 12 to 6 months. Please note that all of the changes to the hardship rules
since GUST apply only to plans that use the safe harbor criteria for hardship
withdrawals.
To add these two additional situations to the financial hardship provisions
of your Solo 401k requires an amendment. Such an amendment should adopt the safe
harbor financial regulations by reference so that any future additions are
incorporated without additional amendment.
