Hardships for dependents

[Laura Harrington]

Good morning. Hope everyone had a wonderful Easter weekend.

If an employee requests a hardship because of expenses for a dependent, do you require the employee to prove that the named individual is their dependent?

If so, what documentation would you request?

Thanks,

Laura

[J Simmons]

If the plan officials and employer have no information to the contrary, the plan administrator ought to be able to rely on the participant's signed statement to the effect that the person is the participant's dependent, per the applicable definition.

[Laura Harrington]

If the plan officials and employer have no information to the contrary, the plan administrator ought to be able to rely on the participant's signed statement to the effect that the person is the participant's dependent, per the applicable definition.

John, thank you for your reply.

I know that Treas. Reg 1.401(k)-1(d)(3(iv)© allows the employer to rely upon the employee's written representation that the need cannot be reasonably relieved through insurance, liquidation of assets, etc. when a plan is using the facts and circumstances definition for determining the amount of financial need.

I cannot find any references that say we can rely on written representation of the employee when determining whether or not a need exists.

Do you know of any support for this?

Thanks,

Laura

[masteff]

You'd generally still want some supporting docs for the need itself (copies of medical bills, tuition estimates, etc). But as to the detail of whether an individual qualifies as a dependent, I'm with John's well-phrased answer.

[Guest Sieve]

I also agree with John. Unfortuantely, however, distribution election forms don't always require the participant to attest to the veracity of the claim of dependent status, so I would make sure the distribution form is properly drafted in the first place.

[Guest ssmith]

I also agree with John. Unfortuantely, however, distribution election forms don't always require the participant to attest to the veracity of the claim of dependent status, so I would make sure the distribution form is properly drafted in the first place.

What if the form isn't drafted to verify the dependency status? I have an email from a client this morning asking what documentation to request from an employee who is requesting a hardship for his mother's medical expenses. Is just having him sign a statement to that fact sufficient or should they request some other documentation????

Thanks for any help!

Sandy

[Peter Gulia]

To show whether a person is the participant’s dependent, what evidence beyond the participant’s statement could “prove” this fact?

I have heard (but not seen) that some administrators ask for a copy of a recent Form 1040 in which the participant names the dependent on line 6c. But for a participant who wants to make a false statement, taking only a few minutes to change an entry or two and reprint what appears to be a tax return seems like a low barrier to fraud. (A plan’s administrator has no way to check what tax return was filed with the IRS.) And because a tax return is its maker’s statement, how is asking for a tax return different from relying on the participant’s statement on the claim form?

Further, looking to a tax return might not be too practical because it’s possible for someone to be the participant’s dependent under the hardship rule yet not be the taxpayer’s dependent for Federal income tax purposes. See, for example, 26 C.F.R. § 1.401(k)-1(d)(3)(iii)(B)(3)&(5) (referring to 26 U.S.C. § 152, but with some exceptions). Also, it’s possible that a person became a participant’s dependent after the taxpayer’s most recent year for which a tax return was required. Likewise, if the plan Sandy Smith asks about provides the deemed-need rule, whether expenses for medical care could meet the rule turns in part on whether the patient was the participant’s dependent when the medical services were provided OR when the participant paid the expense. See 26 C.F.R. § 1.401(k)-1(d)(3)(iii)(B)(1) (referring to 26 U.S.C. § 213(d)).

What are people doing? Is there any useful evidence beyond the participant’s statement?

[masteff]

I was waiting for someone like Peter to come thru w/ an excellent answer like that before chiming in that we only ever required a simple declaration from the employee as to the person qualifying as a dependent. You get yourself into a quagmire if you start trying to qualify every aspect of every hardship, especially if you're going past the actual burden of diligence (if you went beyond the basic burden on this one, why didn't you do it on that other one?).

Of course it's entirely different if you have actual knowledge to the contrary of the employee's declaration.

Oh, I do recall accepting a letter from a medical provider naming the employee as a responsible party for the family member's medical treatment. But seems like the circumstances included the mother living in a nursing home which the employee also paid for, so facts and circumstances do dictate a little on what alternative documentation you might accept.

[Laura Harrington]

Peter makes some very good points. The only way to prove it would be to ask for the same type of documentation that an IRS auditor might request in order to validate the claiming of someone as a dependent on a tax return: receipts, custodial agreements, etc. Who wants to weed through all of that? Certainly not me!

The consensus I received from this message board, as well as other research, was that people simply rely on the participant's statement unless they have knowledge to the contrary. That is good enough for me.

[Guest Sieve]

Peter --

Requesting a 1040 or some other evidence of dependency, if that's what you require administratively, is not intended to "prove" the dependency status to the administrator, but simply to allow the administrator to claim that he/she/it has performed adequate due diligence, much the same way you'd ask for tuition bills or medical bills to verify the existence of the hardship itself. An employee obviously could change the amount of a bill or create a fictitous bill--or present a false 1040--if that's what they choose to do to obtain a hardship distribution. The issue is not what the facts actually are, but what due diligence the employer has performed in order to verify those facts (assuming the employer has no knowledge of a contrary set of facts).

So, I look at this as an exercise in due diligence. And, if you believe that due diligence requires some back-up for the type/amount of hardship, then that same level of due diligence might also require some back-up for the claim of dependency status.

[J Simmons]

The issue is not what the facts actually are, but what due diligence the employer has performed in order to verify those facts (assuming the employer has no knowledge of a contrary set of facts).

Larry, nicely drawn distinction; I agree with the point you are making.

[Peter Gulia]

Sieve’s interesting observation – that one doesn’t omit a diligence procedure merely because it’s possible that what the procedure asks for could be faked – leads to another discussion question:

has anyone had an experience with an IRS examiner who asserted that the plan’s procedure wasn’t enough?

[Guest Sieve]

I, for one, have not had the IRS raise that issue.

But, Peter, do you think that the issue could be raised (i) by a beneficiary who claims that shoddy due diligence caused the deceased's account to be drawn down for the benefit of a non-dependent, or (ii) upon account segregation/payment of a QDRO?

[Peter Gulia]

Sieve is right to suggest that a plan's claim procedure or decision, especially concerning provisions that allow a pre-retirement distribution, could attract some risks of claims from a non-participant harmed by an administrator's weakness in detecting a participant's false claim.

Deciding how much protection a plan's administrator wants against those and other risks is one of many factors about which an administrator should get its employee-benefits lawyer's advice when designing a claims procedure.

A claims procedure usually involves tradeoffs among risk, control, expense, burdens, and even affecting the benefit itself. That's why an administrator must act as a prudent-expert fiduciary to the extent that a claims procedure isn't already specified by ERISA and the plan's governing documents.

(A few times, I've directed administrators' and recordkeepers' cost accountings comparing expenses attributable to claims following approvals of hardship claims to expenses attributable to reviews of denials of hardship claims. If these expenses would not be absorbed by the employer and instead would be properly paid from plan assets, considering how these expenses affect benefits could be legitimate in a fiduciary's evaluation of a claims procedure.)