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New Hardship Rules -proof of hardship


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With all the new hardship distribution rules, is anyone still advising the Plan Administrator to get proof of hardship in case of plan audit?   Participant wants to take 100% of his funds ($360,000 plus).  He provided the wording below from the IRS to show he did not have to submit proof:    Also, he claims the IRS told him via phone call he did not have to submit proof. Thank you! 

3. How does a participant show that he or she is experiencing a hardship?

Generally, if a 401(k) plan provides for hardship distributions, the plan will specify what information must be provided to the employer to demonstrate a hardship. Most 401(k) plans use the "deemed necessary" rules described in Q&A-2 above, so that inquiry into the employee's financial status is not required. In other cases, an employer may generally rely on the employee's representation that he or she is experiencing an immediate and heavy financial need that cannot be relieved from other resources. However, an employer cannot rely on an employee's representation if the employer has actual knowledge that the employee's need can be relieved: (1) through reimbursement or compensation by insurance; (2) by liquidation of the employee's assets; (3) by stopping elective contributions or employee contributions under the plan; (4) by other currently available distributions (such as plan loans) under plans maintained by the employer or by any other employer; or (5) by borrowing from commercial sources. (Reg. Section 1.401(k)-1(d)(3)(iv)(C))

4 out of 3 people struggle with math

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The participant is misunderstanding what the IRS is saying. Not surprising, since it is kind of a subtle distinction.

57 minutes ago, ratherbereading said:

inquiry into the employee's financial status is not required.

This means that the employer is not required to look into the employee's personal finances - bank statements, investment accounts, credit cards, etc. to see if they have some other means available to them to satisfy the hardship. It does not mean that the employee is not required to substantiate the existence of the hardship.

The IRS has this page about hardship substantiation: https://www.irs.gov/retirement-plans/its-up-to-plan-sponsors-to-track-loans-hardship-distributions

Although summary substantiation is permitted, the plan administrator is well within their rights to use the traditional substantiation method. The participant has to comply with the plan administrator's procedures if they want to request a hardship withdrawal from the plan.

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13 hours ago, C. B. Zeller said:

The participant is misunderstanding what the IRS is saying. Not surprising, since it is kind of a subtle distinction.

This means that the employer is not required to look into the employee's personal finances - bank statements, investment accounts, credit cards, etc. to see if they have some other means available to them to satisfy the hardship. It does not mean that the employee is not required to substantiate the existence of the hardship.

The IRS has this page about hardship substantiation: https://www.irs.gov/retirement-plans/its-up-to-plan-sponsors-to-track-loans-hardship-distributions

Although summary substantiation is permitted, the plan administrator is well within their rights to use the traditional substantiation method. The participant has to comply with the plan administrator's procedures if they want to request a hardship withdrawal from the plan.

Thank you! 

4 out of 3 people struggle with math

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ratherbereading, to return to your query about what advisors or service providers recommend or suggest to a plan’s sponsor/administrator, there is a divergence of opinions about whether it’s wise to use what the IRS calls the summary-substantiation method described in the Internal Revenue Manual.

A search in these BenefitsLink forums will turn up a few discussions that air different views.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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21 minutes ago, Peter Gulia said:

ratherbereading, to return to your query about what advisors or service providers recommend or suggest to a plan’s sponsor/administrator, there is a divergence of opinions about whether it’s wise to use what the IRS calls the summary-substantiation method described in the Internal Revenue Manual.

A search in these BenefitsLink forums will turn up a few discussions that air different views.

Thank you! 

4 out of 3 people struggle with math

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Also, keep in mind that while the IRS now permits summary substantiation rather than source documents (e.g., estimates, receipts, etc.), it can still require documentation in some circumstances--namely, where an error occurred.  See the Internal Revenue Manual on this issue.  Specifically, 4.72.2.7.5.1:

"If the notification provided to employees in Step 1(2) or the information reviewed in Step 2(2) is incomplete or inconsistent on its face, you may ask for source documents from the employer/ third-party administrator to substantiate that a hardship distribution is deemed to be on account of an immediate and heavy financial need."

If the IRS does request source documents, those documents may be difficult to obtain after the fact.

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But wouldn't a service provider design its software so a hardship claim that is incomplete, internally inconsistent, or logically inconsistent won't process (except for a denial notice)?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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