Proof of Hardship Needed?

[ERISA1]

I've got a 401(k) plan that uses the "deemed" (safe harbor) definition of hardship. The regs seem fairly clear in saying the Plan Administrator can rely on the participant's representation that no other resources are available. (There is the matter of participant loan availability - but that's not my question.) My question is this:

Can the Plan Administrator rely on the participant's representation that the hardship exists? Or, must the participant present an eviction notice; medical quote; proof of secondary school enrollment; etc.?

As I read the Regs, there is no rule allowing Plan Administrators to rely on participant representation that the hardship itself exists.

thx

[Guest Sieve]

I think you will see differing viewpoints on this Board, but I, for one, believe that there must be proof of the hardship through medical bills, notice of eviction or foreclosure, tuition bill, or similar documents--i.e., something to support the participant's statement that a hardship exists.

[J Simmons]

Not to sound like a broken record, but I agree with Sieve.

[Tom Poje]

oh yeh. this really happened here... someone sent us a death certificate for proof of funeral expenses. someone here looked up the date of death, etc and found it was someone else. if you are going to 'white out' a name and put another one in, don't make it so obvious.

still, to what extent do you take it upon yourself to verify the so called proof.

[Guest Sieve]

Do I call the Dr's office? No (of course, they wouldn't/shouldn't tell me anything, even if I did call), although I have asked for back-up documentation for reconstructive surgery to determine if it was a deductible expense under IRC Section 213(d).

Do I check the authenticity of death certificates? No. Do I check to see if the potential student actually enrolls, or ask for documentation that he/she is a child of the employee? No. Do I confirm that the house listed on the purchase agreement is actually on the market, or that the transaction actually closes, or that the employee actually sells his/her current residence and lives at the newly-purchased home? No.

Could I? Yes. But is it the administator's obligation to become a hardship sleuth? I think not. My sleuthing--i.e., due diligence--generally ends when I receive primary supporting documentation, because I take the position that I need "best available" evidence of the expense, which is something more than "I am having knee surgery that will cost $7,000" or "my son is going to enroll at college in the fall, and the tuition is $12,000 for the first semester" or "I'm going to lose my house if I don't make the next mortgatge payment on time", and something less than confirming that Bob Smith is Bill Smith's 18-year old son. It's just a matter of degree.

[J2D2]

I agree with Larry and the others. We require docs that support the reason for the hardship and the amount requested, but rely on the participant's assertion that the need can't be met from other reasonably available sources.

[masteff]

Smell test, ie, only if you have reason to genuinely question the document. I saw the photocopy w/ an odd shadow around key information (ie white out) a few times myself.

[J Simmons]

oh yeh. this really happened here... someone sent us a death certificate for proof of funeral expenses. someone here looked up the date of death, etc and found it was someone else. if you are going to 'white out' a name and put another one in, don't make it so obvious.

still, to what extent do you take it upon yourself to verify the so called proof.

My white out experience was that the same employee, year after year, submitted the same bid to repair his house for yet another fire. Only the year indicated in the date on the bid was white-outed and typed over. He tried it 3 times after the 'initial' fire and repair snagged him a hardship payout. He did not get a hardship distribution for any year that the white-out was used.

[Guest Sieve]

That's takes real chutzpah!! (definition provided upon request . . .)

Perhaps the true hardship was that he needed to find--and buy--better white-out . . .

[PensionPro]

Here is what the IRS Web site has to say:

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, 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. §1.401(k)-1(d)(3)(iv)©)

However, an employee is not required to take counterproductive actions. For example, the need for funds to purchase a principal residence cannot reasonably be relieved by a plan loan if the loan would disqualify the employee from obtaining other necessary financing. (Reg. §1.401(k)-1(d)(3)(iv)(D))

[J Simmons]

Proof of the expense of a type upon which the payout is premised (and the amount of the expense) is where I require some third-party generated documentation, such as a receipt or EOB.

As for whether the employee requesting the payout does or does not have other financial resources, i.e., is experiencing a financial hardship by reason of the expense, I use the 'deemed necessary' rules as explained on the IRS website and as PensionPro quoted.

I do not think the passage from the IRS website should be read to allow plan administration that does not require proof of the expense (type, amount and incurrence) by way of third-party generated documentation.

[Guest Sieve]

As John indicates, the "deemed necessary" rules only go to whether the distribution is necessary to satisfy the financial need caused by the hardship. But, whether or not there is a hardship in the first place is determined, as the above quote notes in its first sentence, by the individual plan's requirements--and, since I've never seen a plan document that indicates the proof required to demonstrate a hardship, that would be an administrative issue to be addressed by the Plan Adminstrator.

[MoShawn]

How would you handle a case where a participant submits medical bills dating back over three years? (i.e., a hospital bill from 2007, that was clearly issued in 2007) There is no indication of whether any of them have been paid.

Can I rely on the participant's assertion that they are still outstanding? He maintains that they were billed at the time but he never received another billing.

[Belgarath]

"That's takes real chutzpah!! (definition provided upon request . . .)"

Sieve - while there are probably lots of definitions, my favorite to date is: A child who kills his parents, then throws himself upon the mercy of the court because he's an orphan.

Our documents specify that the Administraor must get written certification from the Participant and that available withdrawals and loans have already been taken.

Has anyone heard of the IRS giving a PA a hard time because the PA didn't require anything other than a written certification? Seems unlikley when there's a reg to support this practice.

[Guest Sieve]

Bel -- The written certification plan provision probably applies only to demonstrate that the distribution is necessary in order to meet the financial need (because there are not other availaible assets)--the regs permit this. However, a written certification is not specified in the regs as sufficient to establish that the reason for the financial need is one of the list hardship events. (Good definition, by the way . . .)

SMMoran -- Unless the amount is still outstanding, or unless it was recently paid, I would not permit a hardship for those long-ago medical expenses. You need more info from the medical provider's office. (At least, that's the approach I would take.)

[masteff]

Three year old papers are only good if paired w/ current papers showing the balance is still outstanding.

And you have to be careful on medical bills because they may not clearly show what's covered by insurance. This is why EOBs (explanation of benefits) are a superior document as hardship support; they specifically state what the patient owes.

[Nassau]

I believe that a participant must provide the plan sponsor with proof of a hardship. Thus providing supporting documentation such as medical bills, tuition bills, notice of eviction, etc.

[MoShawn]

The participant did submit medical bills. The issue is that the majority of them are from prior to 2010. I find it extremely difficult to believe that these are not either paid or wrapped up along with other services in one of the later bills. He maintains that they are all still outstanding and the most current that he has received.

[BG5150]

The participant did submit medical bills. The issue is that the majority of them are from prior to 2010. I find it extremely difficult to believe that these are not either paid or wrapped up along with other services in one of the later bills. He maintains that they are all still outstanding and the most current that he has received.

Then ask him to request a current bill. I'm sure any medical office would be more than happy to furnish one upon request if it could lead to payment.

(Although, I would think that a bill from 2007 would have been turned over to a collection agency by now. Maybe not.)

[masteff]

BG5150 makes a good point about collections.

And following on to my own comment above: What you're initially billed and what you ultimately pay are two entirely different things after copay, coinsurance and out of pocket limits, not to mention insurance negotiated adjustments. Even a brand new bill from yesterday should be rejected if it fails to account for insurance payments and adjustments.

...He maintains that they are all still outstanding...

Two simple words to him: Prove it. (And if he won't, then don't believe him. He'll have to pay for his new bass boat some other way.)

Of course the longer statement to him is the IRS mandates the plan have adequate records to substantiate hardship withdrawals and as such your hands are tied w/out current proof from the medical provider of the amount outstanding. This is the IRS's doing and not yours (the IRS makes an awesome scapegoat for hardship documentation requests and rejections). But if it makes it any easier, he can simply have the medical provider fax a current statement directly to you, which would help keep the process moving.