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hardship backup documentation


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Client with a participant requesting a hardship in a plan that is with one of the large national 401k vendors called the vendor with some questions.  (We are the TPA on the plan.)  Backup documentation came up during the conversation and the client was told by the vendor that "unless the TPA needs the backup documentation then it isn't necessary anymore to get such documentation on hardships from the participant."   Is this true?  Did I miss something? 

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Without knowing or remarking on the particular situation you describe:

The Internal Revenue Service allows a method for a claimant to self-certify her hardship without submitting source documents as a part of the claim.  Instead, a plan’s administrator or claims administrator relies on the participant’s written statement (made under penalties of perjury).

A claimant must pledge to keep her source documents, and to furnish them if asked.  But a participant’s breach of that promise won’t tax-disqualify the plan if the plan’s procedure is correctly designed and administered.

Internal Revenue Manual 4.72.2.7.5.1 (08-26-2020) https://www.irs.gov/irm/part4/irm_04-072-002#idm140377115475856

The IRS’s without-source-documents method can work if the plan’s administrator and its service providers carefully meet all conditions of the regulations and that method.

Under that method, an IRS examiner must not ask for source documents unless:

(1) the notice to participants or the claim “is incomplete or inconsistent on its face”; or

(2) some participants received at least three hardship distributions in a plan year, there is no “adequate explanation for the multiple distributions”, and the examiner’s manager approves the request for further information.

If a plan’s administrator and its service provider design the software correctly, #1 would never happen (except for a paper claim, and then only if the claims administrator is careless).

About #2, a plan might limit hardship distributions to no more than two in a year, making #2 not happen.

Even if the plan does not limit the number of hardship distributions, #2 might not happen unless abuses are bad enough that the examiner is motivated to do the extra work of getting her manager’s approval.

Yet, 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.

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