Facts & Circumstances Hardship under audit

This is hypothetical:

Owner wants to add a facts & circumstances hardship provision to plan in order to take a large distribution.

As plan administrator, he will be the arbiter of "heavy and immediate" need.

What if the plan gets audited by the IRS and they determine the need really was neither heavy nor immediate?  Like, maybe he used it to purchase a stake in a thoroughbred race horse or a down payment on an office building.

What is the redress?  pay it back?  Disqualification?

Under SECURE 2.0 self-certification rules, effective now, I think the plan is off the hook.

I don't know what the ramifications are to the participant for misrepresenting a hardship - they already incur taxable income and potential 10% premature distribution tax. Maybe any exception to that 10% tax that could apply is voided.

Internal Revenue Code of 1986 § 401(k)(14)(C) allows relying on a claimant’s certification “that the distribution is on account of a financial need of a type which is deemed in regulations prescribed by the Secretary [of the Treasury] to be an immediate and heavy financial need, and not in excess of the amount required to satisfy such financial need, and that the employee has no alternative means reasonably available to satisfy such financial need.” SECURE 2.0 § 312 [attached].

If the hypo’s mention of a facts-and-circumstances hardship provision refers to an evaluation beyond the seven needs 26 C.F.R. § 1.401(k)-1(d)(3)(ii)(B) deems “an immediate and heavy financial need”, § 401(k)(14)(C)’s tolerance for relying on a claimant’s certification does not apply.

Further, even if the plan allows only deemed hardships and adopts § 401(k)(14)(C)’s self-certification regime, one doubts § 401(k)(14)(C) would protect ostensible reliance if the human who acts for the plan’s administrator is the human who submitted the claim and its certification. In those circumstances, if the certification was false the Internal Revenue Service might plausibly assert that the plan’s administrator “ha[d] actual knowledge to the contrary of the employee’s certification[.]”

relying on claimant certification for deemed hardship.pdf

21 hours ago, Peter Gulia said:

if the human who acts for the plan’s administrator is the human who submitted the claim and its certification. In those circumstances, if the certification was false the Internal Revenue Service might plausibly assert that the plan’s administrator “ha[d] actual knowledge to the contrary of the employee’s certification

True, wasn't thinking about that, and I don't think a Jekyll and Hyde defense works here.

As far as correcting it, you would ask him for the money back (with earnings).  

If he pays it back, put it back in his account; if he doesn't, (assuming the money came out of his account and not someone else's by mistake) the plan sponsor doesn't have to put the overpayment back in. 

If it's an insignificant failure and it was inadvertent (not on purpose), you can self-correct it (even if under examination). Not sure if IRS will believe it's inadvertent if the plan administrator himself got the extra cash (in which case an audit cap sanction may be assessed).