Hardship distribution documentation

[Dan]

Can a plan sponsor rely on a participant's written certification regarding the amount required to satsify a hardship or should the plan sponsor have written documentation to verify the amount?

In days gone by, we told plan sponsors that some kind of documentation of the hardship amount was necessary. A medical bill, eviction notice, etc. But I haven't been able to find anything definative that such documentation is necessary. Was that just a conservative approach to plan administration or is written proof required by a regulation, revenue ruling, etc somewhere?

[WDIK]

Was that just a conservative approach

It is certainly the prudent approach.

[namealreadyinuse]

The represendtation is that it is necessary to satisfy the need. That is only one requirement. The other is that it be an immediate and heavy financial need. That is what the documentation is for.

[stephen]

FROM LAST WEEKS EBIA WEEKLY-

QUESTION: Our 401(k) plan provides for hardship distributions using the safe harbor events, and we have amended our plan to add the two new safe harbor events permitted by the final regulations under Code Section 401(k) that are applicable beginning this year. What documentation should we require for all safe harbor events, including the two new ones? ( Contributing Editors: EBIA Staff. From EBIA Weekly 3/16/2006. )

ANSWER: As discussed in more detail below, your plan should require (as a condition to receiving a hardship distribution) completion of a hardship application and supporting documentation that reasonably demonstrates the occurrence of the hardship event, the financial need, and the dollar amounts involved. Assuming that your plan uses the safe harbor for deeming that the participant lacks other resources to satisfy the financial need, no documentation on this point will be required. (Under the safe harbor, the participant must have obtained all currently available plan distributions--including loans and ESOP dividends--and must be prohibited from making any deferrals or after-tax contributions for at least six months after receiving the hardship distribution.) You should retain all hardship applications and supporting documentation in the plan files so that they are available to support the plan's decision in the event of an audit or dispute.

Here are our suggestions of appropriate supporting documentation for each of the six permitted safe harbor distribution events.

==> Medical Expenses for Participant or Dependent. We suggest that you require a copy of the health care provider bill, along with an insurance company benefit statement denying coverage for at least the amount being requested. If the expense has not yet been incurred, you could require a signed letter from a doctor or other health care provider verifying the need for treatment and the approximate cost. Some plan administrators wonder whether the HIPAA privacy rules apply to medical documentation held by a 401(k) plan. Typically, the HIPAA privacy rules will not apply to a 401(k) plan because a 401(k) plan typically is not a covered entity. But HIPAA will affect the extent to which a covered entity (such as a health plan) may disclose information to the 401(k) plan. Participants are permitted to disclose their own health information (for example, an explanation of benefits in support of a medical hardship request) to the plan. But health information held by your company's health plan or a provider generally would be subject to HIPAA and could not be disclosed by the health plan or provider to a 401(k) plan without the participant's authorization. Once information is provided to the 401(k) plan, whether by the employee or by a health plan or provider pursuant to an authorization, it will not be subject to the HIPAA privacy rules. Other privacy requirements may apply, however, so as with all personal information, it should be handled in a confidential manner.

==> Purchase of Principal Residence. We recommend requiring a copy of the signed purchase agreement.

==> Twelve Months Tuition and Related Costs. We suggest requiring either a bill or a letter from the educational institution, verifying enrollment of the participant or the participant's dependent. The bill or letter should include actual or estimated costs of tuition, room, board, and related expenses.

==> Payments to Prevent Eviction or Foreclosure. For this event, we think you should require a copy of the formal legal document giving notice of the eviction or foreclosure that is required under applicable state law. Generally, a legal notice would state that if the overdue rent or mortgage payment were not received by a specified deadline, formal eviction or foreclosure proceedings would be instituted.

==> Burial or Funeral Expenses. This is one of the new safe harbor events permitted under the final regulations. We recommend requiring copies of the death certificate and the bill from the funeral home showing costs of the burial or funeral.

==> Repair to Employee's Principal Residence Qualifying as a Casualty Deduction. This is the other new safe harbor event permitted under the final regulations. We suggest requiring evidence of the casualty (a description or photograph), a copy of the repair bill, and proof that insurance proceeds did not cover the amount of the casualty expense claimed as a hardship.