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.
- 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:
- 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.
- 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.
- Summary substantiation method for safe-harbor hardship distributions
- 401(k) plans – see
- Internal Revenue Manual (IRM) Section 126.96.36.199.4.1 (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 188.8.131.52.4.1.1 (08-11-2017)
Plan LoansA plan sponsor should retain these records, in paper or electronic format, for each plan loan granted to a participant:
- 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.
- 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.
- 401(k) plans – see
- Podcast: Guidelines for Substantiating Safe-Harbor Hardship Distributions from 401(k) and 403(b) Retirement Plans (8:19 mins.) July 2017
- Substantiation Guidelines for Safe Harbor Hardship Distributions from Section 401k Plans
- Retirement Plan Operation and Maintenance
- Retirement Topics - Hardship Distributions
- Retirement Plans FAQs regarding Hardship Distributions
- Do's and Don'ts of Hardship Distributions
- Hardship Distribution Tips from EP Exam
- Plan Amendment Correction Method for Hardship Distributions
- Correct Common Hardship Distribution Errors
- Retirement Topics - Plan loans
- Retirement Plan FAQs Regarding Loans
- Podcast – computation of maximum loan amount from retirement plans (8:21 mins)
- Fixing Common Plan Mistakes - Plan Loan Failures and Deemed Distributions