IRS Emphasizes Hardship Withdrawal Requirements for Plan Sponsors

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.

Many 401(k) plans, 403(b) plans and 457(b) plans permit hardship withdrawals to be taken. 457(b) plans refer to these withdrawals as “unforeseeable emergencies.” The IRS definition of a hardship is “an immediate and heavy financial need.” Such expenses typically include, but are not limited to:

1. Certain medical expenses

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.

Contact us with questions about employee benefit plans and visit our Employee Benefit Plans Industry Group page to learn more about our service offerings.

Source: Internal Revenue Service Employee Plans News, Issue No. 2015-4 (April 1, 2015).

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 contactSD@schneiderdowns.com.

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.

© 2020 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on

ERISA BY M. Michele Milheim
Tips and Tricks to Ensure You’re Ready for Your Employee Benefit Plan Audit
ADDITIONAL COVID-19 DISASTER RELIEF FOR RETIREMENT PLANS
Employee Benefit Deadlines Postponed Through July 15, 2020
ESOPs as a Business Succession Planning Solution
ERISA BY Jeanne Barrett
Form 5500 Filing Relief for Filings Due Before July 15, 2020
The Cares Act and Its Effect on Retirement Plans

Register to receive our weekly newsletter with our most recent columns and insights.

Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us

contact us

Map of Pittsburgh Office
Pittsburgh

One PPG Place, Suite 1700
Pittsburgh, PA 15222

contactsd@schneiderdowns.com
p:412.261.3644     f:412.261.4876

Map of Columbus Office
Columbus

65 East State Street, Suite 2000
Columbus, OH 43215

contactsd@schneiderdowns.com
p:614.621.4060     f:614.621.4062

Map of Washington Office
Washington, D.C.

1660 International Drive, Suite 600
McLean, VA 22102