Peter Gulia

Which recordkeepers have implemented self-certifying hardship claims? Which have not? What’s the deal with: Ascensus? ADP? Paychex? Empower? Voya? John Hancock? Principal? Fidelity? Vanguard? TIAA? Others? If there is a choice, does a recordkeeper suggest a default norm? If so, is the default self-certifying, review by the recordkeeper, or review by the plan’s administrator.

Artie M.’s explanation that an expense already paid might no longer be an immediate need likely is a mainstream interpretation of a plan’s provision that follows the Treasury’s rule. But some deciders of hardship claims are not so strict. Some reason an employee might have paid a recognized expense without foreseeing how it would affect the employee’s ability to meet other expenses. A financial controller thinks about which expense to pay in what order, including considering expenses to be paid from particular budgets. Many working people don’t think that way, and some administrators reason they shouldn’t be expected to. An ordinary person might pay an emergency expense using money that normally would go to recurring expenses, letting some go past due while waiting for an insurance recovery or a hardship reimbursement. I’ve seen claims procedures under which an expense already paid is recognized for a hardship if it was paid in a recent few months. Some of those procedures were designed by lawyers who knew one’s client’s procedure is certain to be examined by the Internal Revenue Service. A fiduciary designing a claims procedure might balance a need to be reasonably confident that decisions on hardship claims do not tax-disqualify the plan with being reasonably responsive to participants’ claims for a hardship that meets the plan’s provision. A fiduciary that otherwise would lack expertise should want its lawyer’s advice. This is not advice to anyone.

If a plan sponsor wants its plan to provide that a hardship is determined by relying on the claimant’s certification (to the extent I.R.C. § 401(k)(14) or § 403(b)(7)(D) permits): Must or should that provision be stated in the plan documents? Or is it enough that the plan’s administrator’s claims procedure, distinct from the plan documents, states the self-certification regime? Also, even if a procedure would be enough, is there any disadvantage to putting the provision in the plan documents’ adoption agreement? I welcome all BenefitsLink neighbors’ views.

If the participant not only owns it but also lives in it as his principal residence: If the plan provides this hardship need, the participant might consider: “Expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under [Internal Revenue Code] section 165 (determined without regard to section 165(h)(5) and whether the loss exceeds 10% of adjusted gross income)[.]” 26 C.F.R. § 1.401(k)-1(d)(3)(ii)(B)(6) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(3)(ii)(B)(6).

Is the grandmother's residence also the participant's principal residence?

What amount does the participant seek? What expense does the participant claim as his (perhaps including his grandmother's) hardship need? A conservatorship by itself might not make the incapacitated person the conservator's dependent. If the plan provides the Treasury regulations' deemed hardship needs, some of them might apply regarding the participant's primary beneficiary's expenses. This is not advice to anyone.

Looks like I might have guessed wrong in classifying the situation asked about. As BG5150, RatherBeGolfing, CuseFan, and I suggest, a benefit is not forfeitable because the accrued benefit is small. But many plans do what ratherbereading mentions. If the plan provides a small-balance involuntary distribution, the participant is severed from employment, and her account balance is no more than the cash-out level the plan specifies (whether $7,000, $5,000, $1,000, or $200), the administrator obeys the plan and instructs the involuntary distribution. If the account balance is $199 and the distribution-processing fee charged against the individual’s account is $75, that results in a net payment (before withholding for taxes) of $124. To follow TPApril’s example, if the distribution-processing fee to be charged is $100, but the account balance is $90, that might result in a net payment of $0.00. But it is a distribution, even if the distributee sees no money. (Some recordkeepers abate a fee so, as applied regarding a particular distributee, the fee is no more than distributee’s before-charge account balance. Also, some recordkeepers set the charge, if not the fee, so a net payment for the involuntary distribution never is less than $1, $5, or $10. Some do this so routine processing will make records showing that the distribution was paid.) If the plan’s administrator has segregated a forfeiture merely because an accrued benefit is small, each of the plan’s fiduciaries might want its or her lawyer’s advice.

I guessed TPApril didn’t intend to describe a forfeiture, at least not in the legal sense that ERISA § 203 (or Internal Revenue Code § 411) uses the constructs of nonforfeitable and forfeitable benefits. If what’s asked is about a situation in which a benefit is treated as forfeitable because the accrued benefit is small, I too would share BG5150’s question about what the documents governing the plan provide. And that includes interpreting a plan not to provide a forfeiture of a benefit ERISA § 203 commands to be nonforfeitable. Let’s hope TPApril clarifies which situation is asked about—a forfeiture, or an involuntary small-balance “cash-out” distribution.

BG5150, I guess the situation TPApril describes is about a small-balance (< $7,000) involuntary distribution after a participant is severed from employment. If so, TPApril asks about situations in which an account might be so small that a charge for a distribution-processing fee depletes the account, resulting in no net payment. As my note suggests, a plan’s fiduciary (or a service provider helping a plan’s fiduciary) might consider what communication could inform a distributee that the involuntary distribution was made.

If the employer paid the plan’s obligations before documenting an interest-free loan to the plan (and meeting all conditions of the prohibited-transaction exemption), the plan might have no obligation to repay the employer. About whether to reimburse an employer, a prudent fiduciary might want one’s lawyer’s advice about whether paying money when the plan has no obligation would be an exclusive-purpose breach. Each of the plan’s trustee and, if a different person, the plan’s administrator might want its or her lawyer’s advice about whether a fiduciary must or should decline to reimburse the employer until there is a solution that protects the plan’s fiduciaries. The employer might want its lawyer’s advice about whether the employer engaged in a nonexempt prohibited transaction, and whether the employer must or should file an excise-tax return (even if the PT has been corrected). Likewise, the employer might want its lawyer’s or certified public accountant’s advice about how to determine the “amount involved” in a prohibited transaction. There might be a pull toward not getting a lawyer’s help and informally resolving the situation. But recall some TPAs’ saying: “Don’t let the client’s problem become your problem.” Be ready to show that you did not give tax or other legal advice (unless you’re licensed and engaged to provide advice). And to prove that your services were only as instructed by the plan’s administrator and trustee. This is not advice to anyone.

Assuming the plan provides an involuntary distribution (and assuming a plan fiduciary had decided to allocate the distribution-processing fee uniformly to accounts involuntarily distributed): The plan’s administrator might consider no less communication than for a similar distribution that results in a net payment. That might include a § 402(f) explanation, even if the net amount of an eligible rollover distribution is $0.00. (Some service providers and plan administrators do not set up a $0.00 net payment as a reason to suppress a § 402(f) explanation that otherwise is called for.) (Be mindful that the IRS’s 2026 text, unedited, could confuse a reader. The awkwardness begins with the opening sentences: “You are receiving this notice because you are eligible to receive a payment from the [INSERT NAME OF PLAN] (the “Plan”) that you can transfer (roll over) to an IRA or another employer plan. This notice is intended to help you decide whether to roll over the payment (or some portion of it).”) After the quarter-year closes, an account statement ought to show the charge against the individual’s account and the resulting $0.00 balance. Beyond statute-prescribed communications, an administrator or its service provider might deliver—before the distribution is made—a one-paragraph explanation that the distribution-processing charge lowers the distributable account balance to $0.00. Will the payer deliver a Form 1099-R that shows the $0.00 distribution? To protect fiduciaries regarding later claims, one might consider how to preserve evidence that the involuntary distribution was made, and that it resulted in the distributee receiving the benefit she was entitled to. This is not advice to anyone. Have service providers developed a regime I’m unaware of?

Is there any reason the company would not open a new bank account?

Consider also legal and practical differences between the two audiences of disclosures: A service provider’s 408b-2 disclosure to the responsible plan fiduciary can be the service agreement itself, with no separate document. But a 404a-5 disclosure to a directing participant, beneficiary, or alternate payee calls, practically, for a distinct writing beyond the service agreement. Is a sales tax charged against the plan’s assets but not allocated particularly to the individual distributee who caused the sales tax to be incurred? If not charged particularly, is the plan's expense for sales tax generally allocated among all individuals’ accounts, including those who did nothing that incurred a sales tax?

George Morrison, thank you!

EBP, thank you for "cracking the code" for me.