Hardship Amount Available?

 (we only allow hardship withdrawals from employee deferral and rollover sources of money - yes, we know we can change that but don't really want to and that's not a question in this post )

I am the HR manager in the scenario (and worked in 401k recordkeeping back in the stone age of mainframes and quarterly processing as the recordkeeper and the TPA in one of the top 3 large global HR consulting firms)

Is it now common practice to require the employee to fill out all of the hardship distribution paperwork that must be notarized with proof of need prior to the employee (or HR) being able to find out the amount available? I was told our TPA won't tell us the amount upfront before the form is completed by the employee because "We have found that if the maximum amount available is provided, the hardship requested is exactly the amount available.  Since the IRS states that the hardship distribution cannot exceed the amount of the hardship, the participant should provide the amount of the financial hardship amount and reason."

Does it not stand to reason that an employee is not going to ask for MORE than the amount available if they know that is the maximum they can take and if their need meets or exceeds that amount?    And in the end it's the documentation that is going to rule the day on whether it is an approved reason or not and what amount out of the available is going to be given?  (In both cases this last week, both employees had LESS available than their need)

Just curious if this is SOP... or if this is just that the TPA  doesn't want to calculate the amount only for an employee to decide they do not want to take it. In 15 months with this TPA and employer, I haven't had an employee refuse whatever is available even if it was lower than the need. So it is not like I am calling to get "quotes" and then not following through.

In my experience - I occasionally get calls asking for the allowed hardship amount prior to receiving the actual distribution request. It's not super common, but not rare either. 

It would be totally justified IMO for a provider to charge to do that calculation. So regardless if a distribution request actually occurs, the provider still gets paid for that time and effort. 

I have never seen a plan require all of the documentation up front, though I can see why it might want it. I would expect the sponsor to at least be able to give the participant a ballpark figure of how much is available for hardship withdrawal, particularly if it is limited to deferral and rollover. Shouldn't that be enough for the participant to have an idea of how much supporting documentation they need to gather and provide? 

If the money is tracked by a recordkeeper in an individual account, someone should be able to log on and see the money by source. If the deferral is limited to basis then looking at the payroll reports or W-2 might be necessary, as well as seeing if there have been prior hardships that would reduce available basis. 

Our website for participants shows the amount available went the participant logs in and goes to the hardship withdrawal tab.

Talk about micromanagement from the TPA....  tell them to take a pill and relax.  If the participant has a need to the maximum and has paperwork to support it, they are going to get a check for the maximum.

We get participants asking the hardship availability more often than you think.

Look on the bright side, in less than 6 months it won't matter because the basis equation is out the door.

6 hours ago, rr_sphr said:

…  our TPA won't …

... the TPA  doesn't ...

Please let me know if I can help you find a new TPA.

11 hours ago, david rigby said:

Please let me know if I can help you find a new TPA.

I am hoping to be looking soon.....My expectations are a bit higher than theirs obviously.

Before anyone judges the TPA, is it a "TPA" (Third Party Administrator) or an FPA (Fiduciary Plan Administrator)?  If they are an FPA, they are a Fiduciary to the plan and would need the documentation to be able to prove the request.  In my experience, most employees request the "MAX Available"and don't really even know exactly how much they need to satisfy the immediate and heavy financial need so there is a lot of guessing.  The TPA should be able to give a ball park number and let them know that they will calculate the exact amount when proof is provided.  

A simple solution would be to allow hardship withdrawals on earnings from deferrals.  You can also take a look at your Substantiantion Guidelines to determine how much you would be willing to allow the participants to self certify their hardship withdrawals and to be responsible for holding onto their own documentation, etc., effectively removing a lot of liability of going through the documentation process.

I expect that the way we all do hardships is going to change in the next 18 months or so as the proposed regs go into practice, any final regs get published and we are all able to perfect amendents to plans regarding hardship withdrawals.