Hardship Distributions

One of today's items in the Benefits Link newsletter had a write-up on hardship distribution self-certification. The following is an excerpt. I don't read Section 312 of SECURE 2.0 as containing any such restriction. What am I missing, if anything?

Employers may now rely on an employee self-certification that they have experienced a hardship and that the employee has no other funds available to satisfy the hardship. Self-certification is only available for the first hardship request during a plan year.  If the participant requests more than two hardship distributions in one year then the employer is required to have physical proof of the hardship. 

I'm with you. I think the author is mistaken.

I also wondered what that statement was about when I saw it.  

(good for BL newsletter Nielsen ratings)

There is a firm that offers a 401(k) product and they restrict the number of hardships that can be taken in any year to no more than two.  On their web site, they state:

"You can receive no more than two hardship distributions during a plan year (calendar year for all [of our] 401(k) plans)."

This seems to be a restriction on their service model and maybe it is in their plan document.

This seems to be a good example for not treating internet search results as gospel truth.

The article [https://www.consultrms.com/Resources/38/Hardship-Withdrawals/188/Hardship-Document-Should-You-Allow-Self-Certification] seems to elide a description of the self-substantiation method the Internal Revenue Service unveiled in February 2017’s TEGE Council meeting.

Substantiation Guidelines for Safe-Harbor Hardship Distributions from 401(k) Plans.pdf

I emailed the author to request a cite as to why the self-certification only applies to the first hardship withdrawal in a year and she responded with this:

 It is referenced in the guidelines for audit under administrative guidance that was given after Secure Act in 2019.   Please see below.

Substantiation Guidelines for Safe-Harbor Hardship Distributions from Section 401(k) Plans (irs.gov)

The February 2017 memo (later compiled in the Internal Revenue Manual) considered tax law before SECURE 2022, and before SECURE 2019.

The whole text of Internal Revenue Code § 401(k)(14)(C) is:

“In determining whether a distribution is upon the hardship of an employee, the administrator of the plan may rely on a written certification by the employee that the distribution is—

(i)    on account of a financial need of a type which is deemed in regulations prescribed by the Secretary to be an immediate and heavy financial need, and

(ii)   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. 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.”

I.R.C. (26 U.S.C.) § 401(k)(14)(C) http://uscode.house.gov/view.xhtml?req=(title:26%20section:401%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section401)&f=treesort&edition=prelim&num=0&jumpTo=true

Nothing in that text provides an exception to the allowed reliance until:

(1) the Secretary has published a rule or regulation (not subregulatory guidance);

(2) that rule “provides . . . exceptions . . . [for] cases where the plan administrator has actual knowledge to the contrary of the employee’s certification[;]” and

(3) the rule has become effective and applicable.

So far, the Treasury has not even proposed a rule, much less completed a rulemaking.

Amended § 401(k)(14)(C) applies to plan years that began or begin after December 29, 2022.

Nothing in § 401(k)(14)(C) limits an administrator’s permitted reliance according to whether the participant made one or more previous claims, or received one or more hardship distributions, in a year.

Here is the relevant text from the February 23, 2017 IRS memo:

"(iv) If the summary of information reviewed in Step 2(ii) is complete and
consistent but you find employees who have received more than 2
hardship distributions in a plan year, then, in the absence of an adequate
explanation for the multiple distributions and with managerial approval,
you may ask for source documents from the employer or third-party
administrator to substantiate the distributions. Examples of an adequate
explanation include follow-up medical or funeral expenses or tuition on a
quarterly school calendar."

In this case, again it sounds like an overreach where the author takes a suggested review step (that requires IRS managerial approval to take) and presented it as a requirement.  We already have enough actual requirements to consider without making up more.

The Internal Revenue Manual is a set of directions and instructions addressed to IRS employees. Nothing in the Manual is a rule that applies to a taxpayer.

And nothing the Internal Revenue Service or the Treasury department writes can undo an Act of Congress.