Self-certification of H'ships--issues if done wrong?

What are the consequences if a plan allows self-certification of hardships and participants either lie or just don't understand the rules and take withdrawals that are not covered under the Safe Harbor rules?

Does the participant get in trouble?  Does the plan sponsor?  What about a 3(16) Plan Administrator?

(And side note, are self-certifications relegate to only SH reasons?  Or can it be applied to a facts & circumstances provision?)

These are all excellent questions that every plan should think about when adopting self-certification because the plan documents, plan administrative procedures and service provider agreements all may have conflicting legacy language.

Under self-certification, the participant gets in trouble for lying or for not following the rules - unless for plan administrator happens to have knowledge that the hardship is not valid.  The plan administrator is not expected to monitor each hardship.

Self-certification is not limited to the SH reasons, but best practice would be for all hardship reasons and parameters applicable to a facts & circumstances conditions to be in writing and readily available to a participant.

It also seems that best practice would be to limit the number of hardships that can be taken within a fixed time period, and any request exceeding limit would a review by a plan representative or service provider includes the review in the service agreement.

Here’s the text of Internal Revenue Code of 1986 § 401(k)(14)(C):

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.

The Treasury has not yet adopted, or even proposed, a regulation that would state any exception to a plan administrator’s reliance on an employee’s certification.

Although in theory a plan’s sponsor and a plan’s administrator might make some choices about risks and opportunities, many fall in with the service one’s service provider offers.

Differences in tax law and fiduciary law might matter regarding a § 403(b) plan or contract, a governmental § 457(b) plan, another governmental plan, and a church plan.

Paul I reminds us that a plan’s administrator, in designing or updating its procedure for approving and denying claims for a hardship distribution, might read and interpret documents governing the plan, and consider what services are (or are not) provided or offered by one’s service provider.

17 hours ago, Paul I said:

Under self-certification, the participant gets in trouble for lying or for not following the rules

What does this mean?  What kind of trouble?

What is the remedy?  For the participant?  For the plan?

In other words, what is the actual risk to the participant and/or the plan administrator/sponsor?

While these are not a complete list of all remedies:

If a plan intended as one described in Internal Revenue Code § 401(a) is not administered according to the written plan, the IRS might assert that the plan is not such a tax-qualified plan.

If a plan allows hardship distributions contrary to Internal Revenue Code § 401(k), the IRS might assert that the intended cash-or-deferred arrangement is not a § 401(k) arrangement.

A hardship distribution that is not a Roth-qualified distribution counts in income and so might incur Federal income tax, including (if no exception applies) an extra 10% too-early tax. If the distributee’s tax return correctly reports the distribution, one doubts the IRS would pursue a further consequence merely because of the distributee’s false statement to the retirement plan.

Unless the retirement plan or its fiduciary suffers a loss, liability, or expense other than having paid the unmerited hardship distribution, it seems unlikely that a plan’s fiduciary would pursue a claim against the participant for having made a false statement.

(If a distributee sues a plan fiduciary for having misadministered the plan, one hopes a court would find that the distributee was not harmed by obtaining what she asked for.)

Although making a false statement to an employee-benefit plan is a Federal crime, it seems unlikely that the United States would prosecute a mere hardship claimant unless there are extraordinary or unusual circumstances.

This is not advice to anyone.