Form for relying on a participant’s written statement that she has a hardship?

[Peter Gulia]

Has any big recordkeeper yet made available (if a plan-administrator customer asks for it) a form for relying on a participant’s written statement that she has a hardship?

[Belgarath]

Hi Peter - I did a quick internet search, and this was the first item that came up: https://hunterbenefits.com/wp-content/uploads/2023/03/Hardship-Self-Certification-Form-1.pdf

I expect there may be others...

[Peter Gulia]

Thanks. So at least ftwilliam furnishes a form.

Perhaps BenefitsLink neighbors know whether Relius furnishes a form?

The big recordkeepers seem reluctant to implement § 401(k)(14)(C).

Is any big recordkeeper allowing the § 401(k)(14)(C) self-certification?

[Paul I]

It is interesting that the ftwilliam form requires the plan administrator to approve the form.

Before self-certification was available, some big recordkeepers built procedures to process "routine" hardship withdrawals as a service without requiring a sign-off by the Plan Administrator.  The recordkeeper set parameters for the types of hardship they would process and get an authorization from the Plan Administrator to make withdrawals for transactions presented within those parameters.  Transactions presented that were not within the parameters were sent to the PA for review and authorization.

Typically, the participant would complete, sign and send to the recordkeeper a hardship withdrawal form and documentation specified from a list of acceptable documentation.  The recordkeeper would review it and if it was in good order, process the the withdrawal.

I believe that big recordkeepers would like to parameters to include self-certified hardship withdrawal requests as long as the Plan Administrator will extend the PA's authorization to cover those requests.

I also believe that system modifications to accommodate self-certification currently has a lower priority than the other system modifications needed to implement SECURE 2.0 features effective January 1, 2024.

[Peter Gulia]

Paul I, thanks; and I hope you might help me learn more.

If, like the regimes you describe, a plan’s administrator instructs its recordkeeper to treat as good order a hardship claim completed on the self-certifying form the administrator instructs, is that enough?

Or does a recordkeeper think something more is needed for a plan’s administration to get § 401(k)(14)(C)’s protection?

Also, is the needed software change only setting up a revised (or alternate) online claim form?

Or would an administrator’s instruction that a recordkeeper use a self-certifying form touch something else that requires a software change?

(I recognize recordkeepers are setting sooner and later priorities for SECURE 2022 software changes.)

[C. B. Zeller]

I imagine that the recordkeeper would want the Plan Administrator's acknowledgement that they do not have any actual knowledge to the contrary of the information provided on the participant's self-certification.

[Paul I]

I can only speculate since we don't know what guidance will be issued regarding the PA having actual knowledge contrary to the participant's certification, nor guidance on for addressing an employee's misrepresentation.  I expect big recordkeepers will want to be responsive to PAs of very large plans desires not to be burdened with approving routine transactions.  The decision process likely will involve assessing and managing the risk associated with the agreed-upon processing steps.  The risk of a withdrawal being made to someone where the PA has actual knowledge that should not be paid already exists today.

I expect that we will see big recordkeepers explore in the near future the application of AI-based screening that will review the request in the context of the other data of the participant that is available within the recordkeeper's system.

Self-certification is not mandatory, so recordkeepers need to track who does or does not permit it.  This is not too different from tracking the reasons that a plan makes available or tracking the parameters within which the recordkeeper has agreed to process the withdrawals.  The system issue is these items are stored as choices under a plan's system parameters and must be integrated into the system logic.  So yes, there is not a lot of additional information needed, but the system needs to know at what steps in the programming logic and workflows that the system needs to check whether a self-certification will influence the next step.  Not doing something that doesn't need to be done can be as important as doing something that does need to be done.

 

[Peter Gulia]

Corey B. Zeller, thank you.

If a recordkeeper requires the plan administrator’s confirmation that the administrator lacks knowledge contrary to the self-certifying claim on each claim, that interruption could defeat the value of instructing the recordkeeper to process the claims without the administrator’s involvement.

Instead, might a recordkeeper accept (at least from a big-enough customer advised by its lawyers) a plan administrator’s instruction to process the hardship claims presuming the administrator lacks knowledge unless the administrator intervenes?

After all, isn’t it a plan’s sponsor/administrator that owns the risk of a tax-disqualification because the plan allowed a distribution contrary to § 401(k)(2)(B)?

And shouldn’t a service agreement relieve the recordkeeper from a liability or expense that results because the recordkeeper obeyed the administrator’s instructions?

Paul I, thank you for your helpful explanation about recording sponsor/administrators’ instructions about plans’ provisions and administration methods, and about ordering of steps in a system logic. (It has been almost 18 years since I left inside experience with recordkeeping operations, and some of what I remember about that work is dimming!)

[Belgarath]

Peter, you are doing rather well. Some of what I remember about YESTERDAY is dimming...

[Paul I]

The root of this service model is drawing the fine line between a recordkeeper following a set of agreed-upon procedures authorized by the Plan Administrator versus the recordkeeper exercising any level of judgement on a participant's benefits or rights under the plan.  Whether or not this line is crossed has been the focus of litigation over who is liable for the consequences of an operational error (and whose E&O insurance policy is going to pay.)

The lines get blurred further when the PA is a committee that has not delegated any fiduciary responsibility to an internal benefits department, and the benefits department is the group with weekly or even daily interaction with the recordkeeper.

The lines get blurred even further when the benefits department hires a TPA that is independent of the recordkeeper and the TPA's service agreement includes a review and sign-off on a transaction.  (This happens most often when there is a determination of vesting that is needed to compute the amount payable, but can include a review of a hardship withdrawal, disability distribution or death benefit.)

Despite all of this, the PAs and the related service providers in the industry is doing remarkably well in administering a vast number of plans covering a large part of the population.  Shall we say good service contracts make for good relationships?

[Peter Gulia]

For almost any individual-account retirement plan for which the plan’s administrator or other oversight fiduciary has bargaining power and independent advice, clear service agreements set up an opportunity for better working relationships with clearer expectations.

And it’s important for an agreement to be fair to not only the service recipient’s proper interests but also the service provider’s legitimate interests. Among many points, a nonfiduciary service provider should bear no responsibility for the consequences of the plan sponsor’s or the plan administrator’s decision.

[MoJo]

6 hours ago, Peter Gulia said:

Is any big recordkeeper allowing the § 401(k)(14)(C) self-certification?

We are still reviewing this to determine whether we want to offer it to our clients.  Most of our clients use our outsourcing services where we collect an review the necessary documentation to determine if the need exists - so whether it is implemented or not, it won't have must impact on our clients - except for the occasional gripe from a participant who complains (but - they are generally the one who actually don't meet the criteria for a distribution.)  Our concerns, as have been mentioned, are the "actual knowledge to the contrary" provision, and whether an employer's knowledge is imputed to us, as their agent under our outsourcing; the potential for abuse (and if/when a serial requester can be determined to be abusive and denied); why?  I mean the point of a retirement plan is to provide financial resources for retirement - and now we are basically going to allow participants to turn their balance into a Christmas Club account?  Leakage is an issue, and this may exacerbate it.  Now, that said, my ops team that has to review and process these requests are all in on implementing this.

When speaking with clients, I always ask "do you trust your employees to be honest and not abuse the ability this provision gives them?"  The reactions are uniformly priceless and in the negative.....

[Peter Gulia]

MoJo, thank you for sharing more perspectives.

I understand some of the reluctance you describe. And I recognize the difficult business choices you and your fellow executives face.

Still, I hope recordkeepers will build a self-certifying method available to at least big-enough plans so they, with advice and thinking independent of the recordkeeper, can decide their resolutions of the policy and risk questions.

[Gadgetfreak]

Another issue that was not discussed here is the threat of fraud. Although standard ISD requests are the more common type, I imagine that self-certified hardships (without any involvement from the employer) could lead to nefarious activity by scammers. With hardship documentation required, there are at least other means to determine that the person requesting the hardship is indeed the actual participant. With employer involvement, they can actually check with their employee to determine if a request was made. 

Although online requests at least block people behind a username/password (and, hopefully, MFA) security, it can still be hacked. And, with forms, it would be even easier for a scammer to complete it, self-certify a hardship, and get a fraudulant distribution.

[Peter Gulia]

Thefts are always risks to be managed.

For a big recordkeeper, the expense savings gained by lessening the review of hardship claims might outweigh the incremental losses the recordkeeper pays on its cybersecurity promise.

And the recordkeeper should maintain its controls and slowdowns on address changes and bank account changes.

[AMDG]

Self-certification is now permissible for governmental 457(b) plans, but the 457(b) regs are not as formulaic as the 401(k) regs regarding the events that constitute a hardship.  Pending IRS guidance, it seems reasonable to me for a gov't plan sponsor to adopt the 401(k) self-certification service model for its 457(b) plan, especially as EPCRS applies differently (basically, no risk  of plan disqualification).  

I would love your thoughts!  Thanks!

[Peter Gulia]

Please see a discussion under the "457 Plans" message board.

[jsample]

I am also interested to see if large recordkeepers will update their hardship distribution forms with a self-certification box, with the caveat "if your plan allows" or if self-certification is selected at plan set-up, they would include that check box in their online form.  Companies who provide 3(16) services to approve and sign all distributions, loans, and hardships probably would welcome the ease of processing the hardship distribution.  Also, more than likely, a 3(16) provider will never have any knowledge to the contrary as far as knowing the participant's hardship situation, as an employer would.

In addition, the same case may be made for the Pooled Plan Provider who runs a PEP.  The PPP is a fiduciary, signing off on the online hardships without having to ask for documentation would greatly speed up the process and would take another burden off of the employer, which seems to be a selling point of joining the PEP, "you don't have to do anything" (this would be a topic for another thread).

I am not saying that speeding up the hardship process, or telling the employer that it is now easier for their employees to get a hardship makes it better, but I see this trend  happening.  The articles are out there in non-retirement publications and the floodgates are opening.  We have had a significant number of employers already asking about allowing self-certification, almost more than anything else other than the Roth catch-up.

[Belgarath]

We deal primarily with smaller plans, and I'm a huge fan of self-certification. I realize things may be different for large plans. I've never really agreed that the Plan Administrator should have to be the policeman for hardship requests. In terms of "leakage" - and this is speaking purely from experience with our book of business - our experience is that nearly all of the hardship requests are from people with small account balances. The sad fact is that if these folks retired with $15k in their account, it will make very little difference in their retirement, so if they spend it now, (some possibly fraudulently) so be it.

It is probably because I'm getting grumpier in my old age - with the continuous onslaught of rules and regulations that fall upon qualified plans and the administration thereof, I'm very glad to see something like this that actually works to relieve some of the burden. 

[Peter Gulia]

I advise big plans, but through my work as counsel to recordkeepers and other service providers I have deep experience with mid-size, small, and micro plans.

Here’s one more way of considering why public law (and plan sponsors’ choices) shouldn’t make a plan’s administrator a decider of whether an individual needs to use her resources:

Big and mid-size plans long ago arranged for recordkeepers to provide a service of deciding hardship claims. (Governmental plans even longer ago required their service providers to decide unforeseeable-emergency claims.) If a review is anything more than checking that a form, whether paper or website, is filled-out and signed, that’s a cost that gets accounted for in how the service provider quotes fees.

The participants (who bear the plan-administration expenses, no matter how a fiduciary pays or allocates them) are paying for being told whether one’s circumstances are worthy of using one’s own resources.

[Paul I]

My view is that hardship withdrawals are a vestige from the early days of 401(k).  At that time, the IRS focused on the tax deferral aspects of 401(k) "salary reductions".  The IRS agreed to go along with a current tax deferral in support of a participant saving for retirement with the expectation of collecting taxes upon distribution.  To hold participants accountable for their commitment to save for retirement, the disincentive of a 10% excise tax was put in place for early withdrawals.  Recognizing that there could be situations where participants had financial emergencies, the hardship withdrawal rules were put in place but they retained the disincentive of the excise tax.

There was a reluctance to allow participants to decide what was a financial emergency, so there was a need for a gatekeeper.  The Plan Administrator often is the default plan fiduciary, and was saddled with the responsibility to enforce the rules to determine if a financial emergency existed.

The rapid spread of 401(k)s and employers pushing more responsibility for retirement readiness onto participants by promoting higher 401(k) contribution levels has made 401(k) contributions a recurring participant "expense" that rivals a home mortgage.

Today, we are emerging from the torsion of the pandemic.  The pandemic accelerated the shift in the role of 401(k)s from a retirement focus to the 401(k) being a financial resource for any life event that put a financial strain on the participant.  Hence, the recent enumeration of these life events in the Code and regulations that allow early access to 401(k) balances.

There is paradigm shift in the approval process for allowing early withdrawals.  Part of this shift is creating this list of predefined life events that the participant self-certifies and the gatekeeper's responsibility is (effectively) removed from the duties of the Plan Administrator.  Another part of this shift (and one that makes the IRS bristle) is a growing number of legislators that now see taxes on distributions from 401(k)s both as a revenue source and as a mitigation for government-funded financial aid.

Bottom line, traditional hardship withdrawals with their excise tax penalties and Plan Administrator approvals are an anachronism.

[MoJo]

This is boiling down to a philosophical question.  What is the purpose of a 401(k) plan.  Originally, as noted by Paul, it was a tax deferred savings vehicle, as a "supplement" to a pension plan.  Now, however, it is clearly the predominant *retirement* financial resource and as such, IMHO, leakage is a very real concern.  What most employers we deal with consider (because we discuss it with them) is that the downstream impact of leakage is employee who can't, and therefore don't retire when appropriate - resulting in an aging workforce, with attendant decreases in capabilities and productivity, loss of open slots for other's advancement, and - and most importantly - skyrocketing health care costs for that aging workforce.  We have this discussion especially when a client is acquiring another entity with a plan, and deciding whether to demand it be terminated before closing or kept/merged into an existing plan.

Fundamentally, while most clearly perceive their 401(k) balance as theirs - it really isn't (legally) - they are beneficiaries of a trust, established for certain purposes, subject to certain restrictions, and for which they receive a tax benefit.

Leakage is real, and a real problem for the employers we work with.  There is a balance here - and requiring documentation (especially since we, as recordkeeper do the review) isn't really a burden (except to my ops team!)