Hardship Documentation

[JKW]

I have a participant requesting a hardship. I just have a few questions. The plan in questions allows 1 loan at a time and allows for hardship distributions from Elective Deferrals for the 6 typical circumstances .

The participant has a loan and is now requesting a hardship. Typically we have all ours plans send in documentation for the hardship(over due mortgage bill, tuition bill, etc).

1. If the participant has a loan and is going to stop contributions for 6 months is documentations needed? I saw this language that states if its deemed necessary to satisfy an immediate and heavy financial need that 401k plans use this rule so they do not need to obtain proof of financial need.

But looking at the IRS website - I see that it states the plan sponsor is required to keep documentation of the hardship reason.

2. A participant is sending bills for medical services from 2014 and 2015 - can those invoices still be used or should the plan obtain updated invoices?

Thanks In advance for any comments. The documents discusses hardships but is silent on documentation of proof.

[lisam]

If the participant has a loan and is going to stop contributions for 6 months is documentations needed? I saw this language that states if its deemed necessary to satisfy an immediate and heavy financial need that 401k plans use this rule so they do not need to obtain proof of financial need.

Yes, the plan is required to keep documentation showing the dollar amount requested is an outstanding obligation for the participant. I believe what you are referring to with the immediate and heavy need is the safe harbor hardship reasons, which should be defined in the plan document. If you follow the predefined reasons (medical, purchase of a principal residence, tuition, etc.) then the reason is automatically determined to be valid but you must still provide proof of the amount being requested.

The participant is allowed to self certify that they do not have additional funds outside of the plan (IE, you don't need to get copies of their bank statements, denied loans, credit card statements, etc.) and you can accept their word that they have done their due diligence outside of the plan. However you still need proof that the amount being requested inside the plan is valid and will need documentation. See Treasury Regulation Sections 1.401(k)-1(d)(3)(iv)© and (D).

A participant is sending bills for medical services from 2014 and 2015 - can those invoices still be used or should the plan obtain updated invoices?

Treasury Regulation 1.401(k)-1(d)(3)(iii)(B)(1) indicates medical care that would be deductible under section 213(d) is Deemed to be an immediate and heavy financial need. If you cross reference this section to Regulation 1.213-1(1), "...a deduction is allowable only to individuals and only with respect to medical expenses actually paid during the taxable year, regardless of when the incident or event which occasioned the expenses occurred and regardless of the method of accounting employed by the taxpayer in making his income tax return. Thus, if the medical expenses are incurred but not paid during the taxable year, no deduction for such expenses shall be allowed for such year."

This leads me to believe if the amounts have not been paid by the participant than they can still be taken from the plan. However perhaps the plan may want to get an updated invoice to show the current balance due rather than relying on an outdated one?

[JKW]

Thank you so much for all the detail. It is much appreciated. Sorry for the late reply - I am just getting back to looking at this.

Are you familiar with the repair provision too? I have a participant that had damage during a winter storm and had to repair their roof. The invoice is for 2016, even though the damage is in 2015 is that ok to claim? Thanks!