Hardship self-certification

Does a plan have to require self-certification for Hardship distributions?

If it is discovered under audit or otherwise that the hardship should not have been permitted (because the employee lied) what is the penalty?

If you're talking about SECURE 2.0 sec. 312, it says "the administrator of the plan may rely on..." which implies that is is not mandatory.

If the plan allows self-certifications and it later turns out that the employee lied about the hardship, I do not believe that there would be any penalty on the plan or on the plan administrator, unless the plan administrator had actual knowledge that the hardship did not exist and allowed the distribution anyway. That is what it means to "rely on" the self-certification. The law does say that the IRS may issue regulations addressing what happens if it turns out that the employee misrepresented their hardship.

If the plan does not allow self-certification, and the plan administrator allows a distribution for a hardship which later turns out not to exist, then the plan faces disqualification.

Overall, I agree with C.B. Zeller. I just wanted to add the following:

1. It is optional whether a plan will allow participants to self-certify hardships.

2. If the plan allows self-certification and the participant lies, generally there is no liability to the plan or its administrator merely by relying on the self-certification.

3. The exception to 2 is if the plan administrator is aware that the participant is lying, the self-certification cannot be relied upon. If the plan administrator nevertheless authorized the withdrawal, then the plan administrator is subject to liability by disregarding its actual knowledge by authorizing the distribution.