Hardship Withdrawal Documentation

[Guest caseyb]

We are auditing hardship withdrawals processed by our RK. There is a difference of opinion on whether the withdrawal should have been approved based the documentation submitted. is there a published guide on acceptable documentation? I cannot find this on irs.gov or other sites.

Examples:

- Withdrawals for Loan modifications have been approved without documentation of a specific date to pay to avoid foreclosure.

- Loans approved for home purchase without documentation of mortgage. Isn't this double-dipping if they also took a mortgage out for the purchase? Ppt was paid full amount of home purchase from hardship.

- EOBs not accepted for medical/dental, but a payment plan is considered proof of treatment.

Thanks for any guidance you can provide.

[PensionPro]

How does a participant show that he or she is experiencing a hardship?

Generally, if a 401(k) plan provides for hardship distributions, the plan will specify what information must be provided to the employer to demonstrate a hardship. Most 401(k) plans use the "deemed necessary" rules, so that inquiry into the employee's financial status is not required. In other cases, an employer may generally rely on the employee's representation that he or she is experiencing an immediate and heavy financial need that cannot be relieved from other resources. However, an employer cannot rely on an employee's representation if the employer has actual knowledge that the employee's need can be relieved: (1) through reimbursement or compensation by insurance; (2) by liquidation of the employee's assets; (3) by stopping elective contributions or employee contributions under the plan; (4) by other currently available distributions (such as plan loans) under plans maintained by the employer or by any other employer; or (5) by borrowing from commercial sources. (Reg. §1.401(k)-1(d)(3)(iv)©)

However, an employee is not required to take counterproductive actions. For example, the need for funds to purchase a principal residence cannot reasonably be relieved by a plan loan if the loan would disqualify the employee from obtaining other necessary financing. (Reg. §1.401(k)-1(d)(3)(iv)(D))

- From IRS Web site

[Guest caseyb]

How does a participant show that he or she is experiencing a hardship?

Generally, if a 401(k) plan provides for hardship distributions, the plan will specify what information must be provided to the employer to demonstrate a hardship. Most 401(k) plans use the "deemed necessary" rules, so that inquiry into the employee's financial status is not required. In other cases, an employer may generally rely on the employee's representation that he or she is experiencing an immediate and heavy financial need that cannot be relieved from other resources. However, an employer cannot rely on an employee's representation if the employer has actual knowledge that the employee's need can be relieved: (1) through reimbursement or compensation by insurance; (2) by liquidation of the employee's assets; (3) by stopping elective contributions or employee contributions under the plan; (4) by other currently available distributions (such as plan loans) under plans maintained by the employer or by any other employer; or (5) by borrowing from commercial sources. (Reg. §1.401(k)-1(d)(3)(iv)©)

However, an employee is not required to take counterproductive actions. For example, the need for funds to purchase a principal residence cannot reasonably be relieved by a plan loan if the loan would disqualify the employee from obtaining other necessary financing. (Reg. §1.401(k)-1(d)(3)(iv)(D))

- From IRS Web site

Thanks. I did see that on the site, but it doesn't address the specific documentation considered acceptable/unacceptable for purposes of providing the immediate and heavy financial need. Our plan document does not get that specific, either.

[PensionPro]

Not seen anything specific but this discussion might help ...

http://benefitslink.com/boards/index.php?showtopic=43340