Is Your Plan Maintaining the Proper Hardship Withdrawal Documentation?

Is Your Plan Maintaining the Proper Hardship Withdrawal Documentation?

The Internal Revenue Service (“IRS”) issued a reminder on their website in regards to hardship distributions and the requirements for plan sponsors. The reminder came out as a direct result of the failure of most plans to produce the proper and necessary documentation of hardship withdrawals. Most plans in the U.S. have a third party administrator that will handle participant transactions, including the approval of hardship distributions.
A common misconception is that, since the third party administrator handles the transactions, they must also handle the retention of the documentation relating to the transactions. However, the IRS pointed out that the responsibility for retention of documentation, in particular for hardship withdrawals, falls upon the plan sponsor. The use of a third party administrator is not an acceptable excuse for improper plan administration by a plan sponsor.

The question becomes is your plan properly maintaining the correct supporting documentation to support an IRS review?

Per the IRS reminder, the following information is required to be maintained by the plan sponsor and not participants or the third party administrator:

  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 was properly made in accordance with the applicable plan provisions and the Internal Revenue Code.
  4. Proof of the actual distribution made and related Forms 1099-R

Plan sponsors should contact their third-party administrators to obtain the necessary documentation of hardship and approval if this compliance procedure is being performed by the TPA.

A step by step practice aid is available by request at [emailprotected], to assist with hardship documentation.

The information contained herein is not necessarily all-inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your plan’s individual facts and circumstances.

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