IRS reminds plan sponsors that they should track loans, hardship distributions


The IRS reminds plan sponsors that they are ultimately responsible for tracking participant loans and hardship distributions, even if they use a third-party administrator (TPA) to handle participant transactions. This includes meeting recordkeeping requirements.

Hardship distributions

Plan sponsors must obtain and keep hardship distribution records. It is not sufficient for plan participants to keep their own records of hardship distributions, according to the IRS. Failure to have these records available for examination is a qualification failure that should be corrected using the Employee Plans Compliance Resolution System (EPCRS).

Plan sponsors should retain the following records in paper or electronic format:

1. documentation of the hardship request, review and approval;

2. financial information and documentation that substantiates the employee’s immediate and heavy financial need;

3. documentation to support that the hardship distribution was properly made in accordance with the applicable plan provisions and the Code; and

4. proof of the actual distribution made and related Forms 1099-R.

Also, the IRS states that electronic self-certification is not sufficient documentation of the nature of a participant’s hardship. IRS audits show that some TPAs allow participants to electronically self-certify that they satisfy the criteria to receive a hardship distribution. While self-certification is permitted to show that a distribution was the sole way to alleviate a hardship, self-certification is not allowed to show the nature of a hardship. Plan sponsors must request and retain additional documentation to show the nature of the hardship.

Plan loans

The IRS explains that the following records must be maintained, either in paper or electronic format, by plan sponsors for each plan loan granted to a participant:

1. evidence of the loan application, review and approval process;

2. an executed plan loan note;

3. if applicable, documentation verifying that the loan proceeds were used to purchase or construct a primary residence;

4. evidence of loan repayments; and

5. evidence of collection activities associated with loans in default and the related Forms 1099-R, if applicable.

In addition, if participants request a loan with a repayment period in excess of five years for the purpose of purchasing or constructing a primary residence, plan sponsors must obtain documentation of the home purchase before the loan is approved. IRS audits have found that some plan administrators impermissibly allowed participants to self-certify their eligibility for these loans.

Source: Employee Plans News, Issue Number: 2015-4, April 1, 2015.

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