Should a plan allow participants to self-certify other claims?

Last week, a BenefitsLink discussion considered whether self-certifying claims for a hardship distribution might be good or bad.

Advantages: Self-certifying might remove unwanted discretion; simplify claims procedure; lower plan-administration expense; and help employers avoid information one would prefer not to know or even have access to.

Disadvantages: Self-certifying might weaken retirement savings (and might lower an investment or service provider’s revenue); and might speed impostor thefts.

https://benefitslink.com/boards/index.php?/topic/70898-form-for-relying-on-a-participant%E2%80%99s-written-statement-that-she-has-a-hardship/

A hardship is not the only kind of claim for a before-severance distribution a plan may permit a participant to self-certify. Others include:

an emergency personal expense distribution [§ 72(t)(I)];

a qualified birth or adoption distribution [§ 72(t)(H)];

an eligible distribution to a domestic abuse victim [§ 72(t)(2)(K)].

If a plan’s sponsor or administrator is considering not allowing § 401(k)(14)(C) self-certification for hardship claims, are there reasons to treat differently these other claims?

Peter, the attached chart from one of your earlier posts on this topic is illustrative.  You list 4 columns headed

Early? / Rely? / Excuse? / Repay?

and hardships are the only withdrawals with the pattern

Yes    /  Yes   /  No         / No

Hardships, unlike the other withdrawal reasons, are subject to the 10% excise tax on early withdrawals, and most other withdrawals available before a distributable event or age 59 1/2 allow for repayment of amounts to the plan while hardships do not.  One can infer from these rules that hardships are a bad deal versus the other withdrawal reasons.  Hardships have added taxes and cannot be repaid.  But this is not the question you asked.

On balance, hardships have flipped into the group of permitting self-certification.  I would say that a plan - for all withdrawals where there is a choice - should choose to allow or choose to not allow self-certification .  Consistency will be the key decision.  If a plan picks self-certification for some kinds of withdrawals where it is allowed and not for others, participants quickly will figure out that asking for a kind of distribution that allows self-certification is the easier path to getting money out of the plan and possibly paying less in taxes, too.

Distributions added or changed by SECURE 2019 and 2022-1.pdf

Paul I, thank you for your wise thinking.

I concur: If a plan allows self-certifying for other kinds of claims, it’s savvy to allow self-certifying also for hardship or unforeseeable-emergency claims.

How about putting all kinds of claims that are self-certifying on one claim form?

Seeing the several kinds of early-out claims on one form might help a participant see opportunities to use the least restrictive kind that meets her needs.

A participant might avoid an extra 10% too-early tax when she could claim a kind that doesn’t bear that tax.

Likewise, one wouldn’t lose the opportunity to repay an amount into the plan (or some eligible retirement plan) if she can meet her need using a kind of claim that includes a repayment right.

What do you think?

Distributions added or changed by SECURE 2019 and 2022.pdf

That certainly sounds like a practical solution to avoid having multiple single-purpose forms with associated instructions. 

A challenge for each plan is to present to the participant only the choices available under the plan document.  There number of these choices has grown which means the number of combinations of permissible withdrawals has increased significantly. 

If a plan permits a lot of these options and the plan's recordkeeper administers the collection of the participant's elections, it also will be a challenge to present the choices to the participant.  One drawback to online elections is screen real estate, and mobile apps are even more restrictive.  It is doable, but challenging.

Thank you for your kind words.

Yes, it’s challenging for a recordkeeper to order and present a logic path and information when a user has many, and complex, choices.

But Congress decided to allow the choices. (And decided not to rationally reorder the choices.)

And once a recordkeeper offers a service feature to any of its customers, the recordkeeper becomes committed to developing or licensing the software, and making the service available to at least the big-enough customers.