Recent IRS guidance has caused a stir among some plan sponsors and recordkeepers, regarding proof of hardship and record retention for any hardship distribution made from your plan. If your plan allows hardship distributions, now is a great time to make sure your procedures meet the expectations of the IRS with respect to documentation. Remember, as the plan sponsor, you are a fiduciary to the plan and have a duty to make sure the plan operates within its terms and within the provisions of the statute and regulations.
The recent IRS guidance in Employee Plans News, Issue No. 2015-4, April 1, 2015, provides a list of records that a plan sponsor must retain with respect to hardship distributions. The documents that should be retained in paper or electronic format are:
- Documentation of the hardship request, review and approval
- Financial information and documentation that substantiates the employee’s immediate and heavy financial need
- Documentation to support that the hardship distribution was properly made in accordance with the terms of the plan and the provisions of the Internal Revenue Code
- Proof of the actual distribution made and related Forms 1099-R
Plan sponsors may have relied on recordkeepers or TPAs (or even plan participants) to keep these records for them, but the IRS has indicated that is not adequate. If audited by the IRS, the plan sponsor must have access to these records.
One area of confusion surrounds the ability of the participant to self-certify certain information necessary for hardship distributions. The participant CANNOT self-certify the nature of the hardship. If your participant applies for a hardship based on medical expenses, then medical bills should be part of the documentation. If the nature of the hardship is eviction from personal residence, then an eviction notice or other verification must be submitted. The participant IS ALLOWED to self-certify that the hardship distribution is the only way to satisfy the financial hardship, so the employer does not need to get into the participant’s personal finances.
These rules are not new, but service providers may have previously allowed self-certifications for the nature of the hardship, based on language in the IRS’ FAQs on hardship distributions. The IRS will not accept this on exam and has provided clarification in the newsletter in case there was any doubt. The evolution of (and demand for) a completely on-line process may have caused plan sponsors to believe they did not need to obtain this documentation from participants, but it is clear that the IRS believes they do.
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