Should a plan allow self-certifications for before-retirement payouts?

When the Internal Revenue Code of 1986 becomes amended by this week’s Consolidated Appropriations Act, 2023, many provisions that permit a before-retirement payout, including a or an:

eligible distribution to a domestic abuse victim,

emergency personal expense distribution,

hardship distribution (for a deemed hardship),

qualified birth or adoption distribution, or

unforeseeable-emergency distribution (under a governmental § 457(b) plan),

permit reliance on the claimant’s written statement that she meets the tax law’s standard for the kind of distribution requested.

(A plan’s administrator may not rely on such a “certification” if the administrator has actual knowledge that the claimant’s statement is false.)

Let’s leave aside the public policy discussions about whether it’s wise to allow early access to savings purposed for retirement income. And let’s leave aside discussions about whether a self-certification regime invites a claimant’s incorrect, or even false, statement.

Do you see any disadvantage, from the administrator’s perspective, of allowing these self-certification regimes?

Do we anticipate recordkeepers will urge customers to put these claims in self-certification regimes, with tick-the-box forms (whether paper or website), to support nondiscretionary processing that asks nothing of the plan’s administrator (beyond having approved the self-certification regime)?

Perhaps it invites additional cyber-crime? 

That’s a meaningful risk. Anything that increases the ease or speed of payouts heightens risks of impersonator frauds.

But a plan’s sponsor/administrator with bargaining power can shift those risks to the recordkeeper.

Currently we still require documentation to support the financial hardship, and are told by newer participants "I didn't have to do this at the last place I worked."  Here is what we see in a 150k+ participant plan. Participants with no intention to save for retirement, defer to get the match. Then, several times a year claim financial hardship to prevent eviction AND can produce a valid eviction notice. As a very large employer it is a challenge to question this behavior, as we would be viewed as questioning an employee's integrity. We expect to see more of this if we move to deemed hardships (self-certification) and have set system warnings for participants that take more than X hardships within X months, to then request supporting documentation. Despite our best efforts, if we are not careful, 401(k) plans will become more and more like personal bank accounts, with a nice ROR if there is a match! 

Ron401k illustrates a challenge some (not all) employers face.

There are plan-design ways to counter the behavior described, but they are work to administer.

Further, the observation helps remind us that each of the four new Internal Revenue Code texts that allows a plan’s administrator to rely on a claimant’s certification is a may, not a must or shall.