New HArdship Self Certification

Effective immediately (Well at least for calendar year plans) are we no longer required to obtain any support at all for hardships?  The conversation will be "How much do you need?"  "$5,000"  "Are you able to certify it is for one of these pre-approved hardships things?"  If they say yes, they are eligible and that is that, right?  Literally anyone can take a distribution for any reason at any time as long as they are comfortable lying through their teeth to get the money they desperately need (at least as they would define that), right?  Does something bad happen to them if they lie?  Is it subject to any audit at all?

Hardship Distributions. Current law allows distributions on account of immediate and heavy financial need or an unforeseeable emergency, and the amount must be limited to the amount necessary to satisfy the financial need. Certain listed events are deemed to be on account of hardship, and employees are required to submit records documenting the safe harbor event. Effective for plan years beginning after December 29, 2022, plan administrators can rely on employee self-certification that they experienced a safe harbor event and that the requested amount does not exceed the amount required to satisfy the financial need.

There is nothing in the law that requires plan administrators to permit self-certification, or for that matter to allow hardship distributions in the first place. Even if they do choose to permit self-certification, the plan administrator may not rely upon it if they have actual knowledge to the contrary.

Whether a plan allows or precludes a before-retirement distribution is the plan sponsor’s choice.

Whether a plan’s administrator must, may, or must not rely on a claimant’s certification turns on how much or how little discretion the plan’s governing documents grant. (A typical IRS-preapproved document likely grants a user plan’s administrator discretion about whether it relies on or ignores these certifications.)

The Internal Revenue Code of 1986 provisions for relying on a claimant’s certification permit it for each of:

an eligible distribution to a domestic abuse victim,

an emergency personal expense distribution,

a hardship distribution,

a qualified birth or adoption distribution,

an unforeseeable emergency distribution (under a government employer’s § 457(b) plan).

A Federal or State prosecutor may pursue a claimant for a false-statement or theft-by-deception crime. But such a prosecution seems rare. (On January 13, 2022, a Federal grand jury charged Marilyn J. Mosby with four false-statement crimes. An indictment is not a finding of guilt. An accused is presumed innocent until proven guilty in later proceedings.)

I doubt the Internal Revenue Service could tax-disqualify a whole plan if its administrator lacked actual knowledge that the claimant’s certification was false, and the administrator relied no more than the statute allows.

Oh believe me, I'm all over adopting this.  No way it makes sense for the client to incur the extra time and expense (and embarrassment) of validating these things.

Earlier legislative history included this paragraph:

In the case of each of these types of plans, the proposal provides that the Secretary may by regulation provide for exceptions to the plan administrator's ability to rely on participant certification where the plan administrator has actual knowledge to the contrary. The Secretary may also by regulation adopt procedures to address misrepresentation.

So it's hard to say exactly what is permitted without having received any Treasury Department guidance.

The Act’s text is:

“The Secretary may provide by regulations for exceptions to the rule of the preceding sentence in cases where the plan administrator has actual knowledge to the contrary of the employee’s certification, and for procedures for addressing cases of employee misrepresentation.”

New Internal Revenue Code of 1986 § 401(k)(14)(C) is in effect for plan years that began or begin after December 29, 2022.

The tax-qualification condition’s tolerance for an administrator to rely on a claimant’s certification is not conditioned on the Secretary of the Treasury having made regulations.

Rather, Treasury may make regulations to restrain an administrator’s reliance on a claimant’s certification “where the plan administrator has actual knowledge to the contrary of the employee’s certification[.]” Those regulations, if made and not contrary to Congress’s delegation or other law, could constrain an administrator’s reliance on a certification.

But until Treasury makes regulations (and the statute specifies “regulations” rather than IRS subregulatory guidance), an administrator may rely on a certification if the administrator has no “actual knowledge to the contrary of the employee’s certification[.]”

rely on hardship certification.pdf

Of note here is that the plan administrator must therefore be the one signing off on these distributions.  Not sure how that will go over with the folks who went down the 3(16) rabbit hole (we did not).

I don’t read new § 401(k)(14)(C) as precluding a service arrangement under which a service provider processes hardship claims “within a framework of policies, interpretations, rules, practices and procedures” instructed by the plan’s administrator. See 29 C.F.R. § 2509.75-8/D-2 https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-A/part-2509/section-2509.75-8.

OK but at what point does the plan administrator conclude tey do not have actual knowledge to the cotnrary?  If I  was a 3(16) I would conclude it doesn;t make any sense for me to opine on the actual knowledge to the contrary piece because why would I?

Anyway I love this new provision and I can;t wait to find out how to use it!

Peter's .pdf above says it's for plan years beginning after 12/31/2023

The OP says after 12/29/2022

Which is it?

Mine was a copy/paste from an article FYI

Hi BG - I THINK that the date in Peter's PDF that you are referring to is for SECURE 310. The hardship certification issue at hand is SECURE 312, which I read as being effective for plan years after the date of enactment - so for calendar year plans, effective 1/1/2023.

I haven't kept up with this for awhile, but would be very interested in hearing what the DoL and IRS are looking for in their plan audits now.  Back in the day (lol) they asked for the documentation supporting the dollar amount of hardship and confirmed whether it met the Safe Harbor reasons.  I've wondered what they are asking for in audits today, especially knowing that a lot of Plan Sponsors sign forms allowing the Recordkeeper to issue the hardship distribution without a plan administrator signing off on each separate request.  Are the recordkeeper's forms with a self-certification by the participant with no supporting documentation passing government audits of plans?

At least since the 1990s, some plans have used no-substantiation and self-certification regimes for hardship claims.

In a February 23, 2017 memo, the IRS openly recognized no-substantiation regimes.

(The memo, although addressed to IRS examiners, was announced to practitioners with some fanfare in the Joint TE/GE Council’s 2017 meeting, and with news reporting by Bloomberg BNA, CCH/WoltersKluwer, and others. Further, the memo is codified in the Internal Revenue Manual, which anyone may read.)

The memo describes a set of circumstances for which an IRS examiner is instructed not to request source documents to substantiate a hardship.

Some of us see Congress’s Act as a next logical step.

tege-04-0217-0008.pdf

I'm assuming with all of the new inservice distribution options that retirement plan "leakage" isn't a concern anymore?

Gilmore - I hate to be cynical, but tax revenues may be more important than leakage at this point in time.

4 hours ago, AMDG said:

Gilmore - I hate to be cynical, but tax revenues may be more important than leakage at this point in time.

No problem. I was definitely being cynical.

Agree with Gilmore. It seems many of the new provisions of SECURE 2.0 as relate to the young are making it easier to extract from one's retirement savings. I'm not saying there are not valid reasons for doing so, but the trade off is reducing life savings. Compounding returns over long periods, as we all know, is the secret....if there is a secret....to meeting retirement savings goals. Perhaps short term tax revenues and political favoritism trump long term savings?