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It’s Up to Plan Sponsors to Track Loans, Hardship Distributions

Even if you use a third party administrator (TPA) to handle participant transactions, you’re still ultimately responsible for the proper administration of your retirement plan. Make sure you’re keeping up with the recordkeeping requirements.

Hardship Distributions

  1. Traditional Substantiation Method>

    Plan sponsors should obtain and keep hardship distribution records. Failing to have these records available for examination is a qualification failure that should be corrected using the Employee Plans Compliance Resolution System (EPCRS).

    Keep these records in paper or electronic format:

    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 properly made according to applicable plan provisions and the Internal Revenue Code.
    4. Proof of the actual distribution made and related Forms 1099-R.

    It’s insufficient for plan participants to keep their own records of hardship distributions unless the ‘Summary substantiation method’ (below) for ‘safe-harbor’ hardship distributions is used.


  2. Summary substantiation method for safe-harbor hardship distributions
    • 401(k) plans – see
      • Internal Revenue Manual (IRM) Section (09-05-2017), and
      • Exhibit 4.72.2-2, Attachment One Hardship Substantiation Information and Notifications for Summary of Source Documents
    • 403(b) plans – see IRM Section (08-11-2017)

    Plan Loans

    A plan sponsor should retain these records, in paper or electronic format, for each plan loan granted to a participant:
    1. Evidence of the loan application, review and approval process.
    2. An executed plan loan note.
    3. If applicable, documentation verifying that the loan proceeds were used to purchase or construct a primary residence.
    4. Evidence of loan repayments.
    5. Evidence of collection activities for defaulted loans and related Forms 1099-R, if applicable.

    If a participant requests a loan with a repayment period in excess of five years for the purpose of purchasing or constructing a primary residence, the plan sponsor must obtain documentation of the home purchase before the loan is approved. IRS audits have found that some plan administrators impermissibly allowed participants to self-certify their eligibility for these loans.

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