Hardship withdrawals are an optional provision that may or may not be drafted in 401(k) or 403(b) plan documents. If they are offered in the plan, then the Plan Administrator, or Employer, is responsible for making sure that the hardship guidelines rules are followed, just as with any other fiduciary responsibility. New guidelines from IRS clarify the documentation requirements that all Plan Administrators need to know about.
IN GENERAL, a hardship is defined as an immediate and heavy financial need that cannot be met by any other resources. The safe harbor guidelines under the IRS regulations call for hardship withdrawals to come from elective deferral sources only – not employer match or profit sharing. In-service withdrawals are prohibited from Qualified Non-Elective Contributions and Prevailing Wage fringe benefits until after the participant has attained age 59 ½. Hardship withdrawals are subject to income tax, and may be subject to early withdrawal taxes as well.
DEFINITION OF HARDSHIP
A hardship distribution may be requested to help with payment for one of the following events:
The amount distributed under the hardship rules require the following also apply:
DOCUMENTATION REQUIRED
The Plan Administrator (Employer) must determine, based on all relevant facts and circumstances, whether the participant qualifies for the hardship withdrawal taking into consideration the participant’s other resources. For example, the Administrator may request certification or documentation from the Participant to verify that alternative funding through one of the following options is not available to the participant:
SELF-CERTIFICATION IS NOT ADEQUATE
It was argued before the IRS recently that the participant’s self-certification that he qualified for a hardship was sufficient documentation. That argument fell flat, and in their Employee Plans News (issue 2015-4) the IRS provided guidance for Plan Administrators on the need to maintain documentation for hardship withdrawals. Documentation may be kept in electronic or paper format.
RECOMMENDATIONS FOR PLAN ADMINISTRATORS
As a result of this updated guidance from IRS with respect to documentation that may be requested upon audit, we recommend that Plan Administrators retain the following records with respect to hardship withdrawal requests:
SUMMARY
As with many of the rules surrounding qualified plans, distributions and hardships must be carefully monitored by the Plan Administrator. At Benefit Resources we work with plan participants and Plan Administrators to help them understand those rules to avoid having problems pop up later.
If you have questions about your company’s hardship review policy, you are welcome to contact your administrator here at Benefit Resources. If you are not a client yet, ask for one of our pension consultants to help you. We want to be your #1 Resource for retirement plan administration!
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