The IRS may be putting additional focus on the handling of hardship withdrawals for 401(k) plans. In a bulletin dated April 1, 2015, the IRS cautioned plan sponsors to ensure that certain documentation requirements are being met.
2. Payments to prevent eviction or foreclosure on a principal residence
3. Funeral expenses
4. Repair of damage to a principal residence
If a 401(k) plan provides for hardship distributions, it must provide the criteria used to make the determination of hardship. For example, a plan may provide that a distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition.
Record-Keeping Requirements for Hardship Withdrawals
Plan sponsors are ultimately the ones responsible for proper administration of their plans, including hardship withdrawal requests. Although many plan sponsors rely on their third party administrator to perform this function, the plans sponsor is still responsible. Certain recordkeeping requirements are necessary to be retained to support the hardship request. These include:
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 made in accordance with the applicable plan provisions and the Internal Revenue Code; and
4. Proof of the actual distribution made and related Forms 1099-R.
It should be noted that it is not sufficient to rely on the plan participant to retain such records. In addition, participants’ self-certification of hardship is not sufficient. Plan sponsors must also request and retain documentation to show the nature of the hardship. Overall, plan sponsors are responsible for ensuring that their plans are operating in accordance with applicable IRS and Department of Labor regulations and plan provisions regardless of their reliance on third party administrators and investment advisors.
You’ve heard our thoughts… We’d like to hear yours
The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].
Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.
This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.