Do your clients get source documents for a hardship claim?

[Peter Gulia]

The Internal Revenue Manual describes a method for a plan’s administrator to decide a claim for a hardship distribution using only the participant’s written statements, including some that “summarize” an expense incurred.  Under this method, the administrator need not read, nor even immediately collect, a source document that shows the claimed hardship expense. 

https://www.irs.gov/irm/part4/irm_04-072-002#idm140377115475856

 

How many of your clients use this method and do not ask for any source document?

 

How many of your clients require a source document?

 

Do your clients’ methods vary with the plan’s recordkeeper?

[Artie M]

I do not keep statistics on this but some of my clients use this method, against my advice.  I am not sure what you are asking in your final question as I don't think the client's methods can vary from the recordkeeper (TPA).  I know that many TPAs want to use the method outlined in the IRM as administratively it is much more convenient (and some try to force its use).  We let the clients know that even if a plan sponsor decides to use the IRM method, the IRS reserves the right to ask for the hardship source docs.  The information letter on which the IRM is based notes that the auditor should only ask for the source documents in 2 circumstances, but those circumstances are not included in the IRM and even if they were they are only guidance to an auditor.  If audited and the participant doesn't have the source documents or cannot find them, seems like the employer may have to go into Audit CAP (luckily none of my clients have had this issue under audit).  Convenience = increased audit risk.

 

 

[Peter Gulia]

RTM, thank you for your helpful observations.

 

My third question, which I expressed incompletely, goes to whether a plan administrator’s choice between methods is influenced by what services the plan’s recordkeeper provides or offers.

 

The method described in the Internal Revenue Manual was designed assuming that many claims would be presented through internet communications.

 

Some recordkeepers have software designed to follow the method described in the Internal Revenue Manual.  And the software can do so iteratively, not presenting questions that preceding information renders irrelevant.

 

But the summary method the Internal Revenue Manual describes burdens a paper form.  Because a blank paper form doesn’t know which hardship reason a claimant selects, one must present all 31 follow-up questions (and for each some space to fill-in an answer).

 

I imagine a plan’s administrator might be more likely to adopt the summary method if the recordkeeper’s software makes it easy to use.

 

But I’d like to know what BenefitsLink people are seeing.

[Ilene Ferenczy]

Here's another take on the IRM hardship substantiation method:  the employer is required to give the employee certain information, which is easily provided in a preprinted packet, as well as a certification form for the participant to use to advise the plan of the amount of hardship needed, what it was for, and that the participant promises to keep the backup.  If this is done correctly, the IRS can still ask for the source documents but (a) it can only do so under very restrictive situations, and only with a manager's approval; (b) if the participant can't cough up the support documentation, the problem is not the employer's or the plan's ... it has done what is required under the procedure.  So, in my opinion, the substantiation method of the IRM takes much of the burden away from the plan administrator and lessens the burden on the plan if the IRS audits.  I can't see the down side, unless the packet given to the participant is insufficient.  So, be sure to read the IRM and follow it assiduously.