The IRS recently has reminded plan sponsors to verify and document that hardship distributions comply with their plan document and the law, according to a recent posting by IRS Director of Employee Plans Examinations Monika Templeman on the IRS website, "Examination Tips for Hardship Distributions." In some cases, allowing participants to apply for loans or hardship withdrawals online may not allow the plan sponsor adequate opportunity to verify and document the reason the participant is seeking this emergency funding.
Many 401(k) plans allow participants to take distributions from their accounts in the case of a hardship, but the plan document must provide for hardship distributions and describe the circumstances under which hardship distributions will be allowed.
The IRS posting emphasized, however, that the plan sponsor must verify that the participant meets the eligibility criteria for hardship distributions specified in the plan document and maintain records establishing this eligibility, including proof that the participant has exhausted other permissible plan distribution options, such as loans. Plan sponsors that rely on third-party recordkeepers should check with their vendors to ensure that the appropriate documentation is being collected from the participant and retained for plan audit purposes.
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