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Handling 401(k) Accounts on Tax Credit Programs

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

If you manage or own a Tax Credit property, Do you know the answers to these questions about 401(k) accounts?

  • When determining eligibility for a HUD or LIHTC household, should a 401k account be included if its availability is contingent on a hardship?
  • 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 Taxes aren’t paid until the money is withdrawn from the account.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. Assisted housing programs require income certifications to include the cash value of assets. 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.

On HUD and LIHTC Properties 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
  • The resident is totally and permanently disabled
  • The resident inherited the 401(k) and the plan participant is deceased
  • Resident 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.

Determining Income from 401k Assets on Tax Credit and HUD Properties

Since market fluctuations cannot be anticipated, income based on market fluctuations is excluded. However, interest and dividend income are considered income and need 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.

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