Standards of Hardship Proof?

[Guest MaryMac]

I am looking for a source I can go to that would provide details on acceptable proof for hardship withdrawals. I was thinking about incorporating specifics into the written hardship policy for my plan.

I am currently reviewing a hardship application for mortgage foreclosure where the participant has provided a note from the mortgage company that says "due to this delinquency, your loan may be reviewed for a foreclosure action". The use of the word "may" concerns me.

I am reviewing a second application where all the participant has provided is a current mortgage invoice statement that shows a current amount owing and an amount past due. I don't think an amount past due necessarily constitutes a foreclosure. It seems like a fine line.

Does anyone have any insights, links, etc?

Thanks~

[Guest LWilson]

Quite frankly, I've never heard of an administrator applying the rules so painstakingly. Requesting documentation is fine, but splitting hairs over whether the person is going to default now, or 30 days from now is . . . well . . . to each his own.

I would veer from inserting this language into the plan document unless you have an individually designed plan to begin with. You're just adding to the headache of submission if the plan is otherwise straightforward.

Put an administrative manual together for your staff, and that should be fine.

[Guest Gordy]

The regulations all for relying on the representations of the participant for certain of the requirements. Use those and shift the responsibility.

[Guest PAL100759]

The company I work for does require basic documentation from the participant. In addition, we would require an actual notice of foreclosure and would not accept a notice of late payment.

I'm interested in hearing about any experience with what the IRS wants to see when auditing a plan. I've always had them ask for supporting documentation. (I don't know how well they look at it but they ask for it.)

[Guest consultant]

You are on the right track. We also use the same procedure that you are referring to. I think this becomes a state specific question in most cases since foreclosure laws vary for each. In my state, "may" means that they are considering foreclosure and when the mortgage co decides to foreclose, another notice is sent titled "Notice of Foreclosure Proceedings". After receipt of the later, we would then grant a hardship since the property is really in foreclosure status. As you say "may" does not mean "they are" thus, it does meet specific hardship guidelines. Review the specific foreclosure requirements for your state. They will provide the steps and notices that lead up to and then constitute a foreclosure.

Why would you rewrite a document ? The IRS guidelines are there for interpretation which might vary from person to person and for a custom document incorporating your own language for hardships which may vary from the IRS guidelines, good luck on getting that approved.

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Gordy-

As you indicate, the regs do not provide carte blanche to rely on an employee's certification. To allow a hardship withdrawal there must be both an immediate and heavy financial need, and the distribution must be necessary to satisfy that financial need. The regs address the second part, stating that you can rely on the employee's certification that the need can't be satisfied from other sources. (And you don't need this at all if you follow the safe harbor in 1.401(k)-1(d)(2)(iv)(B).)

The regs and examination guidelines do not specifically address what documentation is necessary to satisfy the first part- that is, to establish the existence of the hardship itself. (This is true even if the plan follows the safe harbor and allows hardship distributions only for the four prescribed events.)

I have seen plans that go both ways- some relying solely on the employee's certification that the hardship event exists, others requiring varying levels of documentation, and others simply reserving the right to request documentation at any time.

What's the general experience of others on this issue?

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