Audit Plan Distribution Process to Avoid Headaches
At a recent defined contribution plan conference, a panel of ERISA attorneys was asked, “What are some of the most common issues tripping up your clients in Internal Revenue Service (IRS) or Department of Labor (DOL) audits?”
The first issue they discussed was a growing trend of clients unable to produce the proper and necessary documentation to support the early distribution of plan assets due to hardship withdrawals and loan requests.
In 2015, the problem became so commonplace that the IRS published a reminder regarding plan sponsor documentation requirements for hardship withdrawals and loans. The guidance emphasized that even when a third party administrator is tasked with these processes, the plan sponsor "must obtain and keep hardship distribution records," adding that a “failure to have these records available for examination is a qualification failure that should be corrected.”
Plan sponsors must review the terms of the plan document before authorizing hardship withdrawals or loans. The IRS emphasizes that participants' self-certification for a loan or hardship distribution is not sufficient documentation and must instead be supplemented by proof of the request, review, and approval process. The inability to produce evidence of this required plan distribution process could result in the loss of a plan’s qualified status.
While the guidance provided by the IRS regarding hardship distributions does not carry the same weight as a formal ruling, it indicates this aspect of plan administration is currently a concern and closely monitored. For this reason, we recommend plan sponsors review and retain - in either an electronic or physical format - the documentation required by the IRS for both hardship withdrawal and loan distributions. It is not enough to simply rely on a non-fiduciary third-party recordkeeping partner to fulfill this important fiduciary duty.
As a plan sponsor, you maintain the ultimate responsibility for proper plan administration. Now is a good time to audit your process for hardship withdrawals and loan distributions and avoid the headaches that come with insufficient procedures.