United States: IRS Will Now Permit DC Plan Hardship Withdrawal Self-Certification Summaries

Summary

Two recently published memoranda by the Internal Revenue Service (the IRS) indicate that it is permissible for 401(k) and 403(b) plan sponsors and their third party administrators (TPAs) to rely on participants' written summaries describing their financial hardships when processing hardship withdrawals from plans that apply the safe harbor event rules. Plan sponsors and TPAs may find relief from the former time-consuming, manual reviews of participants' hardship withdrawal documentation.

In Depth

The Internal Revenue Service (the IRS) recently published two memoranda to IRS examinations employees indicating that it is permissible for 401(k) and 403(b) plan sponsors and their third party administrators (TPAs) to rely on participants' written summaries describing their financial hardships when processing hardship withdrawals from plans that apply the safe harbor event rules. To use this method, the plan sponsor or TPA must confirm that the participant has provided all of the summary information described in the memoranda before approving the hardship distribution, and must provide the participant with a notification containing certain information about the distribution. These IRS memoranda provide welcome relief to plan sponsors and TPAs who have complained for years about time-consuming, manual reviews of participants' hardship withdrawal documentation.

Background

Under IRS regulations, defined contribution plans may permit a participant to withdraw retirement plan funds while actively employed if the participant experiences a financial hardship (defined as an immediate and heavy financial need) and the distribution is necessary to satisfy the financial need. The regulations allow plans to either (1) establish their own criteria for what constitutes an immediate and heavy financial need (often referred to as the "general" or "non-safe harbor" hardship withdrawal events); or (2) allow hardship withdrawals only for certain events specified in the regulations, which are deemed to automatically satisfy the requirements of immediate and heavy financial need (referred to as the "safe harbor" hardship withdrawal events). The safe harbor hardship events are as follows:

  • Medical care expenses for the employee, the employee's spouse, dependents or beneficiary;
  • Costs directly related to the purchase of an employee's principal residence (excluding mortgage payments);
  • Tuition, related educational fees and room and board expenses for the next 12 months of post-secondary education for the employee or the employee's spouse, children, dependents or beneficiary;
  • Payments necessary to prevent the eviction of the employee from the employee's principal residence or foreclosure on the mortgage on that residence;
  • Funeral expenses for the employee, the employee's spouse, children, dependents, or beneficiary; and
  • Certain expenses to repair damage to the employee's principal residence.

Regardless of whether a plan applies the safe harbor event rules, the regulations do not outline the process plan sponsors must follow to verify that an immediate and heavy financial need has actually arisen. This lack of guidance has led to a range of approaches for substantiating the existence and extent of financial hardships. Some plan sponsors and TPAs had interpreted the existing guidance to permit reliance upon participant representations regarding the financial hardship ("self-certification"). Other sponsors and TPAs required participants to submit financial and/or legal documentation (such as copies of tuition statements, eviction or foreclosure notices), and then manually reviewed the documentation in order to substantiate the existence and extent of the financial need.

In April 2015, the IRS published an employee plans newsletter article stating that electronic self-certification was not sufficient to document the nature of a participant's financial hardship. The IRS was concerned that plan sponsors and TPAs were relying on participant representations regarding eligibility for hardship distributions without any verification, which was of particular concern in the electronic context where, in many cases, the process had become largely automated. This newsletter created more uncertainty in the benefits community as to what steps were required to substantiate hardship distributions. Those plan sponsors and TPAs that had followed the self-certification approach were concerned that the IRS expected them to obtain, review and retain detailed financial and legal records regarding participants' financial hardships, thereby adding cost and delay to the processing of hardship distribution requests.

February 27, 2017 and March 7, 2017 Memoranda

On February 27, 2017, and March 7, 2017, the IRS issued memoranda (pertaining to 401(k) plans and 403(b) plans, respectively) to IRS examiners stating that sponsors and TPAs of 401(k) and 403(b) plans that apply the safe harbor event rules can rely on a participant-provided summary of the financial hardship, provided that the summary contains certain information. This summary may be in the form of a paper document, electronic communication or telephone record. In addition, the plan sponsor or TPA must provide the participant requesting the distribution with a notification containing certain information about the distribution, as described below.

Summary Information

For a summary to be sufficient to demonstrate a financial hardship, the summary must include the following information

  • The participant's name;
  • The total cost of the event causing the hardship;
  • The amount of distribution requested;
  • Certification by the participant that the information provided is true and accurate; and
  • Certain additional information set forth in the memoranda, based on the type of hardship event (such as the address and purchase price of a principal residence, or the name and address of a medical service provider).

In addition, if a participant requests more than two hardship distributions in a plan year, the participant must provide an adequate explanation for why he or she has requested multiple distributions. The memoranda provide two examples of circumstances that would be sufficient to explain multiple hardship distributions, including follow-up medical or funeral expenses or tuition on a quarterly school calendar.

If a plan sponsor is audited and the IRS examiner determines that a summary does not provide the required information, or an adequate explanation is not provided for multiple distribution requests, the examiner may request the underlying source documents to verify that a hardship distribution was proper. The memoranda indicate that the participant is required to retain the underlying source documents and must provide them to the plan sponsor or TPA upon request.

Finally, if a plan sponsor has outsourced hardship distribution processing to a TPA and the TPA relies on a participant summary to substantiate a hardship, the TPA must provide the plan sponsor, at least once a year, with a report describing the hardship distributions made during the plan year or with access to the summary information.

Participant Notification

If a participant summary is used to substantiate a hardship, the plan sponsor or TPA is required to notify the participant that:

  • The hardship distribution is taxable and additional taxes could apply;
  • The amount of the distribution cannot exceed the immediate and heavy financial need;
  • Hardship distributions cannot be made from earnings on elective contributions or from qualified non-elective contribution (QNEC) or qualified matching contribution (QMAC) accounts, if applicable; and
  • The recipient must preserve source documents and make them available at any time, upon request, to the plan sponsor or TPA.

Next Steps

While the memoranda are not legal guidance that can be relied upon, they provide plan sponsors and TPAs with some comfort that they can substantiate safe harbor hardship distributions without obtaining, reviewing and storing detailed participant legal and financial records, provided that they obtain a summary of the hardship that includes the required information and they provide the participant with the required notification. Plan sponsors should review their hardship distribution procedures and, if applicable, consult with their TPAs to confirm that hardship distributions are processed in accordance with this guidance.  In addition, plan sponsors whose plans permit hardship distributions for non-safe harbor events may want to consider whether to limit hardship distributions to safe harbor events in the future to take advantage of the ability to substantiate a hardship event based on a summary of the hardship rather than a detailed review of participant legal and financial records.

IRS Will Now Permit DC Plan Hardship Withdrawal Self-Certification Summaries

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Fisher Phillips LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Fisher Phillips LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions