Hardship

[Madison71]

What is the recourse if a participant requests a hardship from their plan and submits that appropriate proof that later turns out proved to be fraudalent. Participant already received the money. I believe this is correctable under SCP with the participant required to pay the money back. What if the employee is terminated because of this act? Still have to pay the money back? How do you get it from them? They now have a separation from service and are requesting a distribution. Can you hold it up until the repay?

[Guest Sieve]

The administrator cannot protect against a fraudulent claim, or doctored documents, related to a hardship distribution, but can only perform due diligence at some level (whatever that really is). If you cannot get the $$ back, then you can't get it back--presumably, in any event, the money is gone.

If the individual was not eligible for some other kind of distribution at the time--such as age 59-1/2--then, if you want, you could go in under VCP for making a distribution contrary to the terms of the plan, pointing out the fraud. I think I'd advise a client, if proper due diligence had been performed, to paper the transaction so that all facts are discernible, and leave it be--except that I'd review the hardship due diligence process, and beef it up, if necessary (like calling the Dr., or asking for a marriage license, or contacting the funeral home or insurance company or real estate agent), for future use.

[Madison71]

Thanks Sieve - I appreciate your thoughts on this.

[BG5150]

And if the person is requesting a distribution, why have it paid back and then sent right back out again?

Wasn't a 1099 done for the original, though incorrect, distribution? If so, you'd have a double taxation issue, I'd think, if it was paid back and then re-distributed.

[Madison71]

Great point on the double taxation, but this happened in 2010...no 1099 issued yet. Our approach is to going to be to treat as a hardship and upon termination distribute the rest...make a note in the file and be done with it. Thank you!

[rcline46]

If all of this happend in 2010, when the distribution is made, if not rolled over, withhold the correct 20% of the entire distribution, one 1099. If the balance is to be rolled over, figure out what the gross up would be for the 'hardship', withhold those taxes and distribute as rollover the net. Make your life easy.