Contributing Author: Dianne Schechter, Paralegal
Employees no longer routinely have to provide their employers with documentation proving they need a hardship withdrawal from their 401(k) accounts, according to the Internal Revenue Service (IRS). Employees do, however, need to keep source documents, such as bills that resulted in the need for hardship withdrawals, in case employers are audited by the IRS, the agency said.
Plan sponsors must obtain and keep hardship distribution records. Failing to have these records available for examination is a plan qualification failure that should be corrected using the Employee Plans Compliance Resolution System (EPCRS).
Please sponsors should take mind to keep these important records in paper or electronic format in order to avoid qualification issues:
1. Documentation of the hardship request, review and approval.
2. Financial information and documentation that substantiates the employee’s immediate and heavy financial need.
3. Documentation to support that the hardship distribution was properly made according to applicable plan provisions and the Internal Revenue Code.
4. Proof of the actual distribution made and related Forms 1099-R.
It’s insufficient for plan participants to keep their own records of hardship distributions. Participants may leave employment or fail to keep copies of hardship documentation, making their records inaccessible during an IRS audit of the plan.
Also, electronic self-certification is not sufficient documentation of the nature of a participant’s hardship. IRS audits show that some TPAs allow participants to electronically self-certify that they satisfy the criteria to receive a hardship distribution. While self-certification is permitted to show that a distribution was the sole way to alleviate a hardship, self-certification isn’t allowed to show the nature of a hardship. (See Treasury Regulation Sections 1.401(k)-1(d)(3)(iv)(C) and (D)). You must request and retain additional documentation to show the nature of the hardship.
If you or your plan have failed to keep track of participant loans or hardship distributions in accordance with the requirements notes above, contact Butterfield Schechter today to discuss your options and best course of action moving forward. Our highly skilled employee benefits attorneys are able to advise and assist in meeting all your legal obligations.