How to document compliance with rules governing hardship distributions for educational expenses

Administrators of 401(k) plans that authorize hardship distributions for educational expenses should be certain to document compliance with the governing plan terms and statutory requirements.

Hardship distributions from a 401(k) plan may not be made at the discretion of the employer, but must be authorized by the plan and made in accordance with plan terms. Absent plan authorization, employees are not entitled to a distribution from their accounts even under circumstances that would otherwise constitute hardship. Among the expenses that will warrant a hardship distribution is the payment of tuition and related educational fees and room and board expenses for post-secondary education for the employee, the employee’s spouse, children or dependents.

Plan sponsors should maintain a record of all information used in determining whether a participant was eligible for a hardship distribution and that the amount distributed was necessary to alleviate the participant’s hardship.

A CCH Comment provides an overview of the hardship rules that pertain to educational expenses and discusses how plan sponsors can document compliance with these rules.

Source: IRS Reg. §1.401(k)-1(d)(2)(iii)(A).

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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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