Handling 401(k) Accounts on Tax Credit Programs

401(k) Accounts in HUD Sec 8 and LIHTC programs

Do you know the answers to these questions?

  • If a 401(k) account is only accessible if a hardship is proven, should the asset be considered when determining eligibility for a HUD or LIHTC household?
  • Does investment income based on market fluctuations need to be reflected as income on the asset?
  • Are withdrawals from a 401(k) account considered income?

This article will assist in answering some of the common 401(k) questions as it relates to the affordable housing industry, specifically HUD Section 8 and Low Income Housing Tax Credits.

What is a 401(k) account?

A 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before any deductions. Taxes aren't paid until the money is withdrawn from the account.

How are 401(k) accounts verified?

A 401(k) must be verified directly with the employer or plan administrator. In the affordable housing world, the cash value of assets needs to be reflected on the certification. Therefore, verification of the market value along with verification of costs to convert the asset into cash (taxes/penalties) is necessary. It is also necessary to verify interest/dividends and whether the applicant/tenant is receiving periodic payments.

Is the 401(k) account income or an asset?

If an applicant/tenant receives periodic payments from retirement accounts, the annualized payments would be included as annual income. Sporadic withdrawals from retirement accounts are not counted as income. Refer to your state agency's definition of "periodic".

Are funds in the 401(k) account accessible?

Many times employees do not have access to take 401(k) distributions while they're still employed. Sometimes, employees can access the funds in cases of documented hardship, as specifically defined by the 401(k) plan. Some examples of hardship that may be defined by a plan include:

  • Costs relating to purchasing a principal residence
  • Tuition and related educational fees and expenses
  • Payments to prevent eviction from or foreclosure on a principal residence
  • Burial or funeral expenses
  • Certain expenses for the repair of damage to a principal residence.

When hardship must be proven in order to access a 401(k), the asset is NOT reflected on the certification.

What is the tax penalty?

If an employee has not yet reached the age of 59 ½, the employee will pay a 10% penalty in addition to the income taxes on the amount withdrawn when taxes are filed with IRS Form 5329. If an employee meets one of the following exceptions, the penalty does not apply:

  • Withdrawn as part of a substantially equal periodic payment plan
  • You are totally and permanently disabled
  • You inherited the 401(k) and the plan participant is deceased
  • You retired from the military at age 55

While we are unable to determine the tax penalty based on an applicant's/tenant's income, we can deduct the 10% tax penalty unless the applicant/tenant meets one of the above exceptions.

How is income on the asset determined?

Income based on market fluctuations should not be considered income on the certification since market fluctuations cannot be anticipated. However, interest and dividend income is considered income and needs to be reflected as such on the certification.

We hope this article has assisted you with some of the common questions regarding 401(k)'s. Please contact US Housing Consultants Compliance Department if you have any questions regarding this article.

Housing Quality Standards (HQS) Inspections to be Replaced

Last month (February 11, 2016) HUD sent out an email to industry professionals with an update on the process to replace the HQS (Housing Quality Standards) inspection code with a new inspection code called UPCS-V (Uniform Physical Condition Standards-Voucher).

HUD released a proposed table (click here to view) showing the deficiencies and the so-called "decision tree" that is part of the new inspection code. HUD refers to a "decision tree" as a way of describing the process of determining the nature and severity of an issue.

HUD is attempting to utilize the general format of the UPCS Inspection Code, which is used by REAC, USDA/RD, and Low-Income Housing Tax Credit (LIHTC) properties, and modify the UPCS inspection code to work on a Pass/Fail by Unit format, which had been traditionally used in HQS inspections.

HUD is seeking comments on the proposed table of deficiencies, which is very similar to the UPCS code currently in use, but with a few notable additions. These additions include some basic building code items such as "missing sink traps" and other design issues that are not included in UPCS/REAC Inspections.

The new UPCS-V is planned for release and implementation this year. There is still a lot of changes to come to the design of this inspection code, so the table included above will not necessarily be the final design. Expected changes include creating severity levels, determining what will and what won't cause a unit to fail, and how to generate a numeric score based on the findings.

One of the most interesting elements of this new UPCS-V is that software vendors who provide inspection applications will be provided with the ability to create an export file that can be uploaded to HUD.

Later this year, US Housing Consultants will be offering training on UPCS-V for both professional inspectors and property management organizations. We will be adding new details to our website as the new details are made known to us. We will also be working closely with InspectCheck, the property inspection software/app that our inspection staff utilizes, to get UPCS-V setup and develop an efficient workflow to complete these new inspections.

IRS to Update the LIHTC Inspection Requirements

The Internal Revenue Service (IRS) will post in the Feb. 25 Federal Register a change to regulations that govern the Low-Income Housing Tax Credit Compliance Monitoring. This rule is final as of February 25, 2016, and will be set to expire on February 22, 2019. These changes revise and clarify the requirement to conduct physical inspections, specifically the number of units selected.

The IRS will concurrently issue Revenue Procedure 2016-15 (https://www.us-hc.com/images/pdfs/rev-proc_16-15.pdf) to provide that the minimum number of low-income units in an LIHTC development that must undergo physical inspection is the lesser of 20 percent of the low-income units in the property, rounded up to the nearest whole number, or the sampling scale that is currently used by REAC, which set the maximum sample at 27 units (https://www.us-hc.com/the-score/issue-71.html#reac-sample). This same rule applies to determine the minimum number of units that must undergo low-income certification review (file audit). It is important to note that state agencies remain able to conduct larger samples if they choose to set a policy to inspect larger amounts of units.

The other important part of this change is that the "same unit" rule is being eliminated as part of this update to the regulations. The same unit rule stated that auditors had to conduct the file audit on the same unit that was physically inspected (or vice versa). Now, the units that are chosen for file audit and physical inspection under the UPCS inspection code can be different units within the same LIHTC project.

With these changes, LIHTC properties and the state monitoring agencies now have a lot more flexibility to conduct physical inspections at other times than the file audit and to utilize third party inspections conducted by HUD REAC as the required LIHTC compliance audit. Many states have asked us about the possibility of outsourcing UPCS unit inspections of their LIHTC properties, and the same unit rule always made such efficiencies more cumbersome. These changes do not affect how 8823's for non-compliance are issued by state monitoring agencies. 

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