Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
In a recent “Employee Plan News” issued by the Internal Revenue Service (“IRS”), the IRS emphasized that plan sponsors are ultimately responsible for proper administration of their retirement plan and thus, must maintain documentation of hardship distributions and plan loans even if a third party administrator (“TPA”) handles these transactions. The IRS stated that a failure to provide these records during an IRS examination is a qualification failure that should be corrected using the Employee Plans Correction Resolution System (“EPCRS”).
Documentations for Hardship Distributions
Plan sponsors can retain these documents either in paper or electronic format. The following is a list of the documentation that must be maintained for each approved hardship distribution:
- Documentation of the hardship request, review and approval;
- Financial information and documentation that substantiates the participant’s immediate and heavy financial need;
- Documentation to support that the hardship distribution was properly made in accordance with the applicable plan provisions and the Internal Revenue Code; and
- Proof of the actual distribution made and related Forms 1099-R.
According to the article, the IRS found during audits that many TPAs process hardship requests through electronic self-certification and require participants to maintain their own records of the hardship distribution. The IRS stated that requiring participants to electronically certify and keep their own record is not sufficient because participants may leave employment making these records inaccessible during an IRS audit. The IRS stated further that while self-certification is acceptable to show that a distribution was the sole way to alleviate the hardship, self-certification cannot be used to show the nature of the hardship. The plan sponsor must take the additional step of collecting and retaining documentation showing the nature of the hardship.
Documentations for Plan Loans
With respect to plan loans, the plan sponsor must also retain records either in paper or electronic format for each approved plan loan. The documentation should include the following:
- 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; and
- Evidence of collection activities associated with loans in default and the related Forms 1099-R, if applicable.
If a participant requests a loan in excess of 5 years for the purpose of purchasing or constructing a primary residence, the IRS requires that the plan sponsor obtain documentation of the home purchase (e.g., the home purchase agreement) prior to approving the loan. Also, the IRS is of the view that it is impermissible for plan administrators to allow participants to self-certify their eligibility for these loans.
In light of the IRS's guidance, plan sponsors are advised to review their administrative services agreements to determine whether their TPAs or record keepers are maintaining these records for their plans.