IRS Guidance On Hardship Withdrawals: How To Shift The Documentation Responsibility To The Participant

IRS Guidance On Hardship Withdrawals: How To Shift The Documentation Responsibility To The Participant

By: David I Gensler, MSPA, MAAA, EA

In April of 2015, in an article in the IRS publication Employee Plan News (yes, there really is such a publication) they clarified that when taking a hardship withdrawal, that it was not sufficient for certain third party administrators (TPAs) to rely on plan participants to keep copies of the documents that proved a hardship withdrawal was due to “an immediate and heavy financial need.”  Documents like the explanation of benefits for medical expenses, the purchase agreement for a participant’s primary residence and/or an invoice for funeral expenses are all examples of the paperwork that the TPA should collect before granting a hardship withdrawal. The IRS further stated that, when examining a plan under audit, the failure of the TPA to keep their own independent records was a plan qualification issue. Whenever the qualification of the plan is at risk, the topic gets my attention.

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What Does The IRS Know That You Don’t That Makes Using E-Certification For Hardship Withdrawals Inadequate?

By: David I Gensler, MSPA, MAAA, EA

The plan sponsor is responsible for the proper administration of hardship withdrawals. Under IRS regulations, hardship withdrawals must satisfy two criteria:

  1. The participant must be experiencing (and be able to demonstrate) an immediate and heavy financial need, and;
  2. The distribution is necessary to satisfy that immediate and heavy financial need.

IRS exams have shown that self-certification is permitted to show that a distribution was the only way to alleviate a hardship. That satisfies item number two. However, allowing participants to self-certify the nature of the hardship is not in the eyes of the IRS, sufficient. (number one).   Since both (1) and (2) must be satisfied for a proper hardship distribution, plan sponsors must request and retain additional documentation to prove the nature of the hardship. IRS exams have shown that this is where many retirement plans and plan sponsors fall short.

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