The IRS clarified its rules for documentation of hardship withdrawals and participant loans on its website in 2015.
With respect to hardship withdrawals, sponsors must retain:
- Documentation of the hardship request, review and approval,
- Financial information and documentation that substantiates the employee’s immediate and heavy financial need,
- Documentation to support that the hardship distribution was properly made according to applicable plan provisions and the Internal Revenue Code, and
- Proof of the actual distribution made and related Form 1099-R.
According to the IRS, it’s not sufficient for plan participants to keep their own records of hardship distributions. And electronic self-certification isn’t sufficient documentation of the nature of a participant’s hardship.
With respect to plan loans, sponsors must retain:
- Evidence of the loan application, review and approval process,
- An executed plan loan note,
- If applicable, documentation verifying that the loan proceeds were used to purchase or construct a primary residence,
- Evidence of loan repayments, and
- Evidence of collection activities associated with loans in default and the related
Forms 1099-R, if applicable.
Plan administrators cannot allow participants to self-certify their eligibility for these loans. Some in the employee benefits industry have asserted that these clarified instructions are inconsistent with existing regulations, and that the instructions lack the authority of a true regulation. Until the IRS determines the legitimacy of these concerns, sponsors should adhere to the guidance, unless advised otherwise by counsel.
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