Hardship Distributions: reasonable evidence

[Laura Harrington]

The IRS Q & A from the 2008 ASPPA annual conference included the following:

Question:

"A plan's audit revealed insufficient plan administrator documentation of the actual hardship distributions on file. The benefits manager disputes this responsibility, saying it is between the individual and the IRS. Are there any minimal requirements that plan administrators must conduct before allowing a hardship withdrawal?

"

Answer:

The plan must have sufficient information to adjudicate a claim. Reasonable evidence is needed. See, e.g., regulations relating to Katrina hardships for what you need to show.

I cannot find the regulations the IRS referred to. I read KETRA and IRS Notice 2005-92. Can anyone help?

Thanks!

Laura

[PensionPro]

Announcement 2005-70 pertaining to Hurricane Katrina Relief states that Plan administrators may rely upon representations from the employee or former employee as to the need for and amount of a hardship distribution, unless the plan administrator has actual knowledge to the contrary, and such distribution is treated as a hardship distribution for all purposes under the Code and regulations.

[Laura Harrington]

Thanks PensionPro.

That is the only statement I could find. I just wasn't sure if that was what they were referring to. It almost seems too good to be true.

In the original question an IRS auditor said the plan administrator did not have enough evidence. But the answer from the IRS appears to be that unless you have knowledge to the contrary you can rely on the employee's representation.

[Guest Sieve]

I disagree with the ASPPA questioner's suggestion that it's between the IRS & the participant. At a minimum, there's a tax-qualification issue & a tax withholding issue, and neither of those involves the participant.

In any event, Laura, because of the tax-qualification issue, you might want more than a mere oral representation--like bills, foreclosure letters, etc. At least, that's my take on the due diligence responsibility.

[Laura Harrington]

I disagree with the ASPPA questioner's suggestion that it's between the IRS & the participant. At a minimum, there's a tax-qualification issue & a tax withholding issue, and neither of those involves the participant.

In any event, Laura, because of the tax-qualification issue, you might want more than a mere oral representation--like bills, foreclosure letters, etc. At least, that's my take on the due diligence responsibility.

I agree with you. I do not think it is between the IRS and the participant either. But the IRS' answer did not help much, as it appears to tell the questioner they did not have to ask for additional evidence unless they had knowledge that the participant was lying.

I work for a TPA. We have recently started a service for some of our 403(b) clients where we actually approve and disapprove hardships for the employer. We are setting our policies concerning documentation.

The question posed to me by the manager of this department was whether we should require someone to prove that a residence is their primary residence in the case of eviction, foreclosure or casualty repairs? Also, should we require someone to prove that damage done to their property was due to a casualty. As you know, neither the Code nor the regulations provide specific guidance on issues like this one. I am trying to determine what would be "reasonable evidence".

I am considering recommending that if the address of the residence for which the eviction or foreclosure notice applies or if the address of the residence for which the casualty repairs are being made match the address we have on file as provided by the employer, then no further documentation will be needed. But if the address does not match, we should require additional proof, such as a utility or phone bill addressed to the participant at that address. Does this sound reasonable?

[masteff]

Sounds like a good plan to me. The main time I anticipate you'll find a mismatch is someone who uses either a PO box or a commercial mailbox (like Mailboxes, Ect.) rather than their residence. But they should be able to easily provide something connecting them to that address (a tax bill would be ideal).

I will note that the "representation" referred to above is more likely referring to a written representation. The Service's prior conversations have always referred to written rather than oral representations for hardships.

[K2retire]

Anyone who owns more than one home is likely to have utility bills for both that could be sent to the address of the home whether or not it is a primary residence. My family did that for years. One of the homes is likely to be in a location different from the employment location. So is the primary residence the one they stay in to go to work, or the one where they live while not working?

My parents' personal property taxes were audited because the homes were in different states. Among the considerations of the auditor is where they were registered to vote, which state issued their driver's licenses and where their cars were registered.

This is a difficult question and the answer is likely to depend on the mood of the auditor.