HArdship Distribution Documentation / IRS NEwsletter

[austin3515]

Was Fidelity the source of the IRS's newsletter regarding ensuring that plan sponsors keep hardship documentation?

http://dcda.fidelity.com/static/dcle/WPSFidelityPerspectives/documents/FF_YFC_42215_Hardship_withdrawal_721275_final_041715.pdf

It certainly seems that way. The largest 401k provider in the country says "ee's can self certify hardships" which as far as I know is quite contrary to everything I ever read on the topic. Just curious...

Any thoughts on whether or not Fidelity will win this fight? They certainly put together quite a defense...

[Peter Gulia]

Based on the April 1 release, it seems more likely that the IRS newsletter article might be a reaction to something heard one month before at the February 26-27 joint meeting of the Great Lakes, Gulf Coast, and Pacific Coast Area Tax-Exempt and Government Entities Division councils and Mid-Atlantic and Northeast Pension Liaison groups.

That Friday’s talk included an idea about relying on the participant (rather than the plan’s administrator) to keep the evidence that shows a hardship expense. Stephen Swirnow, a lawyer at T. Rowe Price, explained a view that a claims procedure for hardship distributions that relies on the participant to keep his or her documents that support the hardship might, if the plan’s administrator also uses several compensating controls, be sufficient to meet tax-law requirements.

While everyone concurs that a 401(k) plan’s administrator should use honest efforts to detect and prevent fraud, that’s hard to do. In real transactions, a fraudster faces the opposing interests of a person that does not want its money or property stolen. But a hardship-claiming participant takes money from his or her individual account; other participants do not suffer a direct loss when their plan pays a hardship distribution its claimant was not entitled to.

Scrutiny of hardship claims might slow down payments to participants with legitimate claims, and might not detect enough frauds to be worthwhile. For example, requiring a plan’s administrator to read a claim’s supporting documents that show the hardship expenses might not accomplish much because it’s too easy for a participant to fabricate documents that look real. (The IRS’s newsletter view seems to follow an unstated assumption that requiring a claimant to furnish supporting documents will deter at least some false claims because some would-be claimants are too lazy or uncreative to fabricate documents.)

Putting too much effort on hardship claims might be an imprudent expense in a plan’s administration. If a plan pays a service provider to investigate (or even to read, without any further inquiry) hardship claims, how does incurring such an expense advance the exclusive purpose of providing retirement benefits?

What do BenefitsLink mavens think?

[austin3515]

The IRS’s newsletter view seems to follow an unstated assumption that requiring a claimant to furnish supporting documents will deter at least some false claims because some would-be claimants are too lazy or uncreative to fabricate documents.)

I take you have a negative view on society... I think the vast majority of people are honest law abiding citizens who would not falsify information even dire circumstances. Certainly no requirement to hire a private detective to validate information, but asking for the records seems like a reasonable means of ensuring compliance.

What about spousal waivers. Participant says "oh, we got divorced 4 years ago!" to which the prudent administrator says "OK, get me a copy of the divorce decree." Or how about "you have an incorrect date of birth for me, I turned 50 last year" to which the prudent plan administrator says "OK, let me just get a photocopy of your drivers license."

I think too that the mere fact that participants a) are desperate, and b) do not have expertise in the definition of what a hardship is (which medical epxenses are covered, is my leaky roof a casualty or just wear and tear, using proceeds to payoff student loans) makes the possibility of noncompliance so incredibly high that the plan administrator would be way too remiss in leaving it to the participant to verify. It's akin to letting the fox guard the henhouse.

[Peter Gulia]

No, I think people are honest. Rather, it’s the Internal Revenue Service that suggests that a retirement plan’s administrator should not rely on a participant’s written statement that she has written evidence to substantiate her hardship.

My observation is not about the many people who do not make a false statement. Rather, it’s that the IRS hasn’t thought through whether a requirement to furnish documents (rather than confirm that the claimant has them) would get the results the IRS imagines. In my experience, a requirement to submit supporting documents often delays the delivery of money to people who really need it (and already had fairly stated a legitimate hardship). But a paper requirement doesn’t screen out the falsity of a claim made by one of the determined few.

Is the purity of a provision against a too-early distribution so important that an employer should be forced to treat its employees as misbehaving children?

If all participants bear the expense of receiving, processing, and keeping supporting documents that an employer will have chosen (prudently) not to investigate, what is the purpose of having those documents?

[austin3515]

If all participants bear the expense of receiving, processing, and keeping supporting documents that an employer will have chosen (prudently) not to investigate, what is the purpose of having those documents?

I answered this in my original post. Someone who knows the rules ought to be the judge of compliance.