Hardship Withdrawals - new TPA procedure

[Guest Aust916]

Our 401k plan's TPA just notified us that they are going to offer a new hardship withdrawal distribution procedure under which a participant will be required to e-certify the purpose of the distribution and provide specific details about his or her financial need. The plan uses the safe-harbor hardship rules. The TPA is proposing that participants will no longer be required to provide supporting documentation of the financial need at the time of the application. Instead, participants will be told to retain any supporting documentation and that the plan administrator reserves the right to request that documentation at any time. The TPA says that the regs do not state that separate written supporting documentation is required to demonstrate a financial need and in the absence of definitive guidance, its new procedure should be sufficient to meet any IRC requirements. Any thoughts?

[GMK]

two cents from a plan administrator

I wouldn't allow distributions without the plan administrator's approval (or e-approval), and I wouldn't grant such approval until I'd seen sufficient written supporting documentation.

But others may have a better way to do it.

[david rigby]

Lots of opportunities for fraud.

[QDROphile]

Even if you don't have fraud, you have people under stress who do not fully understand the standards and are not looking to be conservative (to say the least). The typical example is the standard for preventing foreclosure or eviction, and I don't think a notice of a missed payment will suffice in most cases, but I don't expect the participants to come up with that conclusion by themselves. Unless an informed person gets a lot of specific information, a proper conclusion can't be reached. The easiest way to get full and true information is to have the materials in hand, not described by the participant and perhaps subject to a few questions.

If you really are limiting the question to availability of other resources (not a question in a safe harbor design), the regulations do allow certification by the participant and the plan administrator does not have to make a determination (but can't avoid what the administrator actually knows).

[K2retire]

And does anyone really believe that all participants will be able to come up the appropriate documentation 2 or 3 years later, especially when they've long since changed jobs?

[Jim Norman]

IRS regs allow the Plan Administrator to rely on a participant representation as to hardship. Assuming the PA does this, and has no other knowledge to the contrary, is there any consequence to the plan if, in fact, the participant's hardship representation was not correct?

Seems to be from the PA perspective, it would be best to always rely on the participant representation and not otherwise look to document the hardship. Once the PA moves beyond the representation, then the PA is making a determination regarding the financial situation of the participant. Why take on this additional burden if the regs don't require it?

[QDROphile]

I think the regulations allow reliance on a representation of the participant only with respect to availability of other resources to meet the need. See section 1.401(k)-1(d)(3)(iv)©. The plan administrator does not have to investigate the participant's assets and finances. The plan administrator has to make a determination of all the other matters.

And it does matter to the plan. Bad hardship withdrawals can disqualify the plan.

[Jim Norman]

Understand a bad hardship is a qualification issue. But if the plan uses the safe harbor hardship rules and relies on employee representation as to no other resources available, that pretty much just leaves the Plan Administrator to ensure that the amount is appropriate.

So, assume the request is for an amount to avoid eviction, the PA determines that the amount is reasonable, say the amount shown on the Pay Rent or Quit Notice, plus gross up for taxes. Participant represents that he has no other resources available and PA has no personal knowledge to the contrary. Hardship is granted. Later under examination IRS determines that the participant did have other resources available. So it is a bad hardship distribution. But still shouldn't be any consequence to the plan since the reg allows reliance on representation. Participant already paid taxes and penalties on the distribution. What, if any, other consequence might there be?

OTOH, if the PA did not rely on a participant's representation, but made its own determination as to whether or not the participant had other resources, the PA is taking on more burden and risk than the regs require. If the PA missed other resources reasonably available, the plan again has a bad hardship, but now there is a qualification issue at stake.

[QDROphile]

It appears that you agree with my point that the plan adminstrator has more to do with a determination that an amount is neceesary to avoid foreclosure or eviction than taking a representation from a participant. Therefore, to return to the original post, a paperless arrangement is not appropriate for demonstration that the plan administrator made a proper determination. You identified records that the administrator should receive before making the determination, and those records should be retained by the plan for some time.