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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An Important IRS Deadline Is Looming, Different Types of Plan Documents

By: David I. Gensler, MSPA, MAAA, EA, AIF®

In 2006, Congress passed the Pension Protection Act of 2006 (PPA). As a result, every defined contribution plan, other than 403(b) plans, must be completely restated, so that they comply with PPA.  The “drop dead” date to sign and date the restated plan is April 30, 2016. So if you sponsor a 401(k) plan, a profit-sharing plan or any other sort of a defined contribution plan, the plan must be restated, signed and dated by that date. If your plan gets audited by the IRS, the very first thing that they will ask you for is a copy of the plan document. That is not the time to be wondering if you ever updated your plan or not.

There are basically three types of plans that a plan sponsor could adopt:

A Prototype Plan – This type of plan contains two elements: an adoption agreement and a separate trust document. Many of you are familiar with the adoption agreement, which generally contains various choices for eligibility, vesting, whether the plan will be a safe harbor plan or not, etc. You choose which provisions that your particular plan wants to operate under by checking the appropriate box in that section of the document. The IRS has pre-approved all of the various options, so you cannot pick anything that would be in conflict with the law.

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Automatic Enrollment and Automatic Escalation – The IRS and the Department of Labor Love Them – But Should You?

By: David I. Gensler, President

Both the IRS and the Department of Labor (DOL) love the concept of automatic enrollment and its sibling, automatic escalation of an employee’s salary deferrals. But just because the government is in love with the concept doesn’t mean that you need to be.  Or (more importantly) that you are administratively geared up to handle it.  So if you are thinking seriously about modifying your plan document to change your 401(k) plan to be an “auto enroll” 401(k) plan, there are some real potential administrative speed bumps that you need to be aware of.

The concept is fairly simple. You modify your plan document, via an amendment, to automatically enroll participants at some specified deferral percentage (the one that I have seen most often is 3%).  Some plans extend the concept to all participants, others have it impact only new participants.  Now, in order to stop the deferrals, rather than formally opting in, the participant must, in writing, opt out.

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