EP exam director provides tips on taking hardship distributions

In the latest issue of Retirement News for Employers, Monika Templeman, Director of EP Examinations, provides employers who offer hardship distributions in their retirement plans some tips to keep their plans in compliance.

Definition of hardship

To receive a hardship distribution, a plan participant must have an “immediate and heavy financial need,” and the hardship distribution can only be for the amount necessary to satisfy that need. The IRS regulations give some qualifying situations for hardships, including:

• medical expenses for the participant, participant’s spouse, dependent or beneficiary;

• costs directly related to the purchase of the participant’s main home (excluding mortgage payments);

• tuition, related educational fees including room and board expenses for the next 12 months of postsecondary education for the participant, participant’s spouse, children, dependent or beneficiary;

• payments necessary to prevent eviction from the participant’s main home or foreclosure on the mortgage on that home;

• funeral expenses for the participant, participant’s spouse, children, dependent or beneficiary; and

• certain expenses to repair damage to the participant’s main home.

Templeman notes that the plan sponsor, can avoid hardship distribution errors simply by following the plan language. However, she cautions that plan language must specifically describe the criteria and situations in which the plan may make a hardship distribution. In addition, she emphasizes, it’s important to keep documentation to substantiate a participant’s reason for the hardship.

EP finds many errors in applying the hardship rules, said Templeman, including making hardship distributions when the plan document doesn’t allow them. However, plan sponsors can correct this error under the Self-Correction Program by adopting a retroactive amendment to their plan to allow hardship distributions.

Applying for hardship distribution

If the participant has a financial need that requires a hardship distribution from the plan, he or she must submit an application. Some employers require a paper application and others use electronic applications. Either way, participants should submit the following documentation with their request:

• Written representation of the hardship.

• The amount necessary to cover the hardship. The participant should calculate the amount they need to relieve the hardship. The employer needs to know the amount to determine if it’s reasonable.

• Written representation that the participant can’t relieve the hardship through other resources.

Templeman cautions that hardship distributions should be a last resort. “These distributions can’t be repaid; they’re a permanent reduction in your retirement account. If you must take a hardship distribution from your plan, understanding your plan document and the hardship rules will help both the employer and employee with these distributions,” the EP director states.

Source: IRS Retirement News for Employers, August 20, 2013.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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