Employer Erroneously Issued Hardship Withdrawal

[Guest Kristily]

Is the employer penalized for incorrectly granting a hardship withdrawal to an employee? If so, what is the penalty? How can this be remedied?

[Guest newto401kaudit]

"Is the employer penalized for incorrectly granting a hardship withdrawal to an employee? If so, what is the penalty? How can this be remedied?"

I have the same question, too. I am auditing a 401k plan and noted 2 things regarding the hardship disbursements. 1) some were in excess of the "immediate and heavy financial need" and 2) some were disbursed to pay off student loans (which does not fit the tuition for the next 12 months rules).

I've looked at the IRS Fix-it Guide. There seems to be no solution under the SCP (self-correcting program). The VCP (Voluntary Correction Program) hints that a solution is to ask for the participants to repay the amounts plus earnings, but acknowlegdes this will be problematic and goes on to say that the solution depends on the facts and circumstances. The VCP require a payment for the VCP agent to examine the situation. This is something the client would prefer to avoid. Is there something else that should be done to fix this with regards to plan assets?

Also, from the audit report stand point, is this type of non-compliance supposed to be disclosed inthe financial report?? This is a limited-scope audit and we disclaim an opnion.

[shERPA]

Request the funds be returned to the plan.

If the funds are not returned to the plan, nothing can be done to force the participant to do so. Document that the request was made and followed up on. Also document what changes are being made to internal procedures to avoid this occurring in the future. That's about all that can be done.