Leaderboard

Here is the relevant text from the February 23, 2017 IRS memo: "(iv) If the summary of information reviewed in Step 2(ii) is complete and consistent but you find employees who have received more than 2 hardship distributions in a plan year, then, in the absence of an adequate explanation for the multiple distributions and with managerial approval, you may ask for source documents from the employer or third-party administrator to substantiate the distributions. Examples of an adequate explanation include follow-up medical or funeral expenses or tuition on a quarterly school calendar." In this case, again it sounds like an overreach where the author takes a suggested review step (that requires IRS managerial approval to take) and presented it as a requirement. We already have enough actual requirements to consider without making up more.

I recently evaluated a similar situation for a client who had a terminally ill participant under age 59-1/2 who was on leave. Here is part of my answer: "As far as the 10% early withdrawal penalty because he’s not 59-1/2 yet, SECURE 2.0 does contain an exception to the penalty on early distributions for individuals with a terminal illness. A physician must certify that the employee has a terminal illness on or before the date the employee takes a distribution. Further guidance is needed on what type of evidence is sufficient for the plan administrator. The term “terminally ill individual” means an individual who has been certified by a physician as having an illness or physical condition which can reasonably be expected to result in death in 24 months or less after the date of the certification. (Code §101(g)(4)(A)) SECURE 2.0 says that 84 months is substituted for 24 months in this case. It sounds like [recordkeeper] is not yet set up for this provision of SECURE 2.0, which is not surprising. There are so many moving parts to the changes in SECURE 2.0 for recordkeepers in particular that they’re scrambling right now. And, as with this provision, we all await further guidance on many provisions. Because the 10% early withdrawal tax is assessed to the individual and does not affect the distribution amount, there is some time for [recordkeeper] to figure out how to report this. [Recordkeeper] would withhold the normal 20% now when it distributes. When the participant files his taxes, he would pay the 10% tax penalty at that time. I assume that by tax season next year, [recordkeeper] will be able to code his 1099-R with a special code indicating a physician certified his terminal illness and there will be a Schedule to attach or someplace to report it on the Form 1040, but that is unknown at this time. Here are two other exceptions to the 10% early withdrawal penalty that could work in this participant’s case: The participant is totally and permanently disabled. The employee separates from service during or after the year the employee reaches age 55." In my client's case, they looked into the requirements for life insurance and other benefits to see if they would be adversely affected by terminating the participant. They determined that his benefits would not be adversely affected, so they opted to terminate him and presumably, he used the age 55 exemption to avoid the 10% early withdrawal penalty. That was a cleaner approach than going with the SECURE 2.0 provision for them.

it is Six months after the date the participant reaches age 59 1/2. You want to be careful and wait a day or two after that, because some systems count it in days and not months. ( it is not anytime during the year in which they reach age 59 1/2)

In the absence of specific language to the contrary, based on the information given, I'd say it should be allowed.