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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.

Keep documentation for hardship distributions

Plan sponsors must 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. Participants may leave employment or fail to keep copies of hardship documentation, making their records inaccessible during an IRS audit of the plan.

Also, electronic self-certification is not sufficient documentation of the nature of a participant’s hardship. IRS audits show that some TPAs allow participants to electronically self-certify that they satisfy the criteria to receive a hardship distribution. While self-certification is permitted to show that a distribution was the sole way to alleviate a hardship, self-certification isn't allowed to show the nature of a hardship. (See Treasury Regulation Sections 1.401(k)-1(d)(3)(iv)(C) and (D)). You must request and retain additional documentation to show the nature of the hardship.

Keep documentation on 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.

Additional resources

Page Last Reviewed or Updated: 27-Apr-2017