Which recordkeepers allow a hardship distribution on a participant’s certification?

[Peter Gulia]

Employers might have a range of views about whether a plan should allow a hardship distribution on no more showing than the participant’s certification.

But some employers welcome this opportunity to simplify a plan’s administration.

And a recordkeeper or third-party administrator that provides a service of vetting hardship claims (whether as the § 3(16) decision-maker, under a nondiscretionary procedure the administrator instructed, or as a preliminary look before the administrator decides) might welcome this opportunity to lower its operating costs.

Yet, some recordkeepers are unready to switch to the participant-certification regime, even with a customer plan administrator’s written instruction. They say they don’t want to implement the change until there is Treasury or Internal Revenue Service guidance.

What are they worried about?

Is any big recordkeeper allowing hardships on the participant’s certification?

[CuseFan]

2 hours ago, Peter Gulia said:

What are they worried about?

Maybe accelerated plan leakage - loss of assets on the RK platform = lower asset-based fee revenue? Responses might be masked differently, but honestly, how many RKs out there really want to make it as easy as possible to get assets off their platforms?

The one legit reason might be cyber-fraud concerns, where potentially any account could be targeted for a withdrawal, not just those of separated or 59 1/2 in-service eligible participants. But if that is an RK's concern, then maybe they aren't doing enough cybersecurity now, so that may be a red flag.

These are just my anecdotal thoughts from the recesses of my brain, for what they're worth, not any official position or expression of observed occurrences.

[Paul I]

All of the big recordkeepers currently have an option for processing hardship withdrawals for reasons that are in the list of safe harbors.  A client has to authorize this service formally and the agreement is structured to be very clear the recordkeeper is acting administratively and only to the extent authorized by the client.  The goal for the recordkeeper is to avoid fiduciary responsibility as much as possible.  Some have taken the step to become 3(16) administrators but still ask for similar authorizations from the client.

Claims of acting as a service provider in an administrative functional role and off-loading fiduciary responsibility seems to have offered some protection to recordkeepers when claims have been pursued.

I suspect there is some discomfort for recordkeepers on relying only on a participant certification of the hardship.  The participant (almost always) is not a fiduciary and the new provision says the plan administrator can rely on the participant's certification.  That seems to give the PA some distance from the hardship, which may be perceived as increasing the recordkeepers' exposure.  Maybe the recordkeepers are hoping the IRS will acknowledge the recordkeepers role is administrative and the IRS will say explicitly that the recordkeepers can rely on the participant's certification.

This is a lot of speculation on my part, and probably a flight of fantasy about the IRS.

[Peter Gulia]

CuseFan and Paul I, thank you both for your smart observations.

The statute grants the Secretary of the Treasury a power to provide “by regulations for exceptions to [reliance on a claimant’s certification] in cases where the plan administrator has actual knowledge to the contrary of the [participant’s] certification[.]”

But until regulations are published, effective, and applicable, the statute alone governs.

The statute provides that “the administrator of the plan may rely on a written certification[.]”

And if the administrator may rely, why shouldn’t its servant rely, especially if their service agreement protects the nonfiduciary service provider’s obedience to the fiduciary’s instructions?

How many recordkeepers want to make it so easy to get assets off their platforms?

About not making hardship too easy, some recordkeepers now hesitating about § 401(k)(14)(C) certifications were advocates of the IRS’s no-substantiation method.

Also, many of the new distributions require little explanation, and some are designed for relying on a claimant’s certification. (For example, many employers would prefer not to know any facts that might support a domestic-abuse distribution.)

Like it or not, Congress decided that a plan’s sponsor may provide these early outs.