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Thank you both for your responses - Are either of you able to answer/give your opinion on the following? 1 - Is the employee allowed to pay back these funds? Or was the statement made about this not being allowed correct? 2 - Assuming the funds aren't paid back (which is expected), should any updates be made to the 1099-R?

Hello! Client has a plan with self-certification of hardships. All requests are automatically approved based on employees "signing off" that they have the required proof of hardship. Client did an audit and found an employee was abusing this, contacted them, and found that they have been taking Hardships without any immediate need. Client is looking for guidance on how to correct this. Initial thought was that the employee should repay what was taken that didn't have proof, however, the legal team at the provider stated that this wasn't allowed. They were given the following: "The sponsor of a retirement plan that allows hardship distributions cannot reclaim a hardship distribution after it has been disbursed to the participant. Rather, the sponsor can refuse to approve a hardship request prior to distribution if the participant is deemed not to have an immediate and heavy financial need or if the sponsor has actual knowledge that the participant's self-certification of hardship is false. The plan sponsor does not have the authority to "reclaim" money already distributed because hardship distributions are subject to taxes and potentially a 10% penalty. Reclaiming the money would essentially be canceling an early withdrawal, which isn't permitted under IRS rules after the funds have been paid out." Is this correct? I feel like I have seen this done at other places I have worked. If this is allowed, and the participant does not work with the client to pay back the funds, what should be done in that case? Thanks in advance for any responses.

We provide recordkeeping services. Our legal team spoke with the client about all of this and chose not to listen to the advice given which is where the hold harmless came in. All testing was covered during onboarding. We have recorded calls for all of the above. I personally received a request to assist in updating their testing to reflect $0 contributions by the owner and, since I have never seen a client do this in all my years, I wanted to get other opinions on how to look at this. As for the issue with earnings/dividends, I don't think the team that handled this had a process in place for such a request. It wasn't a typical ROE where all of that would have been calculated but it was one of the first things that stood out to me. Personally, I would have pressed for a first-year QNEC of about $7k that would have helped them pass 2022 and 2023 TH testing. At this point I am looking for options before preparing any 'updated' testing since I am split on how it should look. I am also aware of 5500s being done on accrual but this company has taken the stance that they will all be done on a cash basis.

Hello! We have a client that started their plan in 2022 and failed ADP and TH testing due to their owner maxing out their contribution. Their TH Funding was going to be almost $30k and they demanded a reversal of all the owner's contributions in 2022 which were processed recently after many conversations on why this was a bad idea and having them approve a hold harmless letter. Several questions about this: 1 - Does the reversal change the TH test? The balance as of 12/31/22 hasn't changed, and I know first-year plans can use accrual, but I have only ever used that when adding employer contributions to the total. Was not sure how this should/could be handled since I have never had a client actually go through with a request like this. 2 - Similarly, the Form 5500 will reflect the amounts that were in there on 12/31/22 since this is done on a cash basis. So do their quarterly statements. Should any of this be updated or should it all be left as-is? It's just a glaring issue in an audit and I am fine with that as the client signed off understanding they need to own everything that comes with the request. 3 - The reversal that was processed was for exactly $20,500 and all earnings/dividends remained in the plan. Thoughts on how this should be handled? Their letter of direction stated the exact amount versus making it all look like it never happened but, again, such an obvious issue if looked into. Thanks!