The Internal Revenue Service (IRS) recently issued a publication about appropriate documentation retirement plan sponsors should keep for participant hardship and loan requests.

For hardship withdrawals, the plan sponsor should retain the following records in paper or electronic format:

• Documentation of the hardship request, review and approval;
• Financial information and documentation that substantiates the employee’s immediate and heavy financial need;
• Documentation to support that the hardship distribution was properly made in accordance with the applicable plan provisions and the Internal Revenue Code; and
• Proof of the actual distribution made and related Forms 1099-R.

The agency says it is not sufficient for plan participants to keep their own records of hardship distributions, and electronic self-certification is not sufficient documentation of the nature of a participant’s hardship.

Speaking at the American Society of Pension Professionals and Actuaries’ (ASPPA’s) first-ever virtual conference, Bob Kaplan, ASPPA Government Affairs Committee co-chair and national training consultant with Voya Financial, noted that after the issuance of the publication, industry groups and providers, including the American Benefits Council and Fidelity, sent a letter to the IRS saying that prior guidance led them to believe they could rely on participant self-certification.

Ilene H. Ferenczy, managing partner at Ferencszy Benefits Law Center LLP, and Craig P. Hoffman, ASPPA general counsel, said that at different events, the IRS has consistently said there needs to be proper documentation of the nature of the financial hardship, and self-certification is not sufficient.

Kaplan speculated that some people in the retirement industry may have misconstrued guidance issued in 2008 in relation to Hurricane Katrina. At that time, the IRS said plan sponsors do not have to have documentation of the nature of the hardship to issue a distribution. However, he pointed out, the guidance said plan sponsors have to follow up to get the documentation after the distribution.

Kaplan said plan sponsors can rely on self-attestation that the participant has an immediate and heavy need for the assets to be distributed, unless the plan sponsors knows for sure otherwise.

He suggested that getting documentation of the nature of the hardship up front is a good idea because it may be harder to get documentation after a participant gets his money. Having documentation will protect plan sponsors in case of audits.

Because of the letters to the IRS, “there may be more to come,” Kaplan stated. “But, the publication shows how the IRS feels about appropriate documentation right now.”