Hardship Withdrawal Documentation

[Guest Madison]

If you have a participant that request a hardship withdrawal and the only documentation you collect was a signed statement by the participant that states the hardship is to pay medical bills. You are later audited the auditor discovers the participant did not qualify for the hardship. What/ who is pentalized and how? Can this cause the plan to be disqualified>

[J Simmons]

An in-service distribution when not permitted? I would think this could be a disqualifying event, but would bet that you could CAP it. I've only VCP'd such a situation we discovered informally, when not under audit.

[401_4_ever]

Does the plan allow other in-service distributions that this could be re-characterized as?

[Belgarath]

I don't see how, offhand, that this would be considered a disqualifying event, unless the PA had ACTUAL knowledge to the contrary. A PA is permitted to rely upon the written representation of the employee that the otherwise allowable hardship event need cannot be reasonably relieved through various other resources. See 1.401(k)-1(d)(3)(iv)©.

[Peter Gulia]

An administrator’s evaluation of a participant’s claim for a hardship distribution involves two prongs: (1a) Has the participant claimed an “immediate and heavy financial need” of a kind for which the plan provides a distribution? (1b) What’s the amount of that need? (2) Can the participant relieve his or her need by means other than taking the hardship distribution?

The paragraph that Belgarath helpfully cites allows reliance on the participant’s statement “[f]or the purposes of paragraph (d)(3)(iv)(B)” – that is, the no-other-means prong. Some administrators interpret the rule’s express statement about relying on the participant’s statement for one specified purpose as suggesting that the Treasury department’s interpretation of IRC § 401(k)(2)(B)(i)(IV) doesn’t allow such reliance for other purposes. [see generally Bryan A. Garner, Black’s Law Dictionary (8th ed. 2004) at 1717 (“Expressio unius est exclusion alterius. The expression of one thing is the exclusion of another.”)]

Other administrators ignore this hoary maxim, and interpret a plan to permit a distribution based on a participant’s claim without further evidence if the facts and circumstances make it reasonable to do so. One of those circumstances might be the administrator’s belief that a participant ought to be deterred from lying if the plan’s claim form tells a claimant that submitting a false claim is a Federal crime that can be punished by a fine and up to five years’ imprisonment. See 18 U.S.C. §§ 664, 1027. Without considering whether such a belief is reasonable, I’m aware of IRS examinations in which an employer has successfully defended a claim-form-only procedure.

Moreover, even if an administrator believes that some participants would submit a false statement, it’s also easy to imagine that they could almost as easily fabricate ostensibly independent evidence. I’ve seen forgeries of death certificates (complete with accurate colors and raised gold seal) that to any but the most eagle-eyed reviewer look the same as the real thing. How hard would it be to fake a physician’s bill or a servicing bank’s eviction notice – especially when many genuine documents of this kind are merely laser-printed on cheap paper?

ERISA § 404(a)(1)’s standard of care permits a fiduciary to resolve the tensions in the sometimes competing elements within that standard. An administrator could find that it’s prudent to design a claims procedure to leave out a step that wouldn’t screen out many false claims and that would find them only at unreasonable expense.

Please understand that none of the views described above reflects the advice that I’d give a client.