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Hardship Withdrawal Substantiation Guidelines: Is Your 401(k) Plan Compliant?

March 29, 2017

Plan Sponsors of qualified 401(k) and 403(b) plans are advised to be aware of the February 23, 2017 IRS Memorandum, which was issued to agents to help clarify the IRS substantiation guidelines for safe-harbor hardship withdrawals.  With this Memorandum, the IRS has taken a visible step forward in defining their requirements pertaining to proper substantiation and documentation of these withdrawals, under safe harbor rules.

If your plan adheres to the “safe-harbor criteria” when administering hardship withdrawal requests, be sure that the withdrawals are taken in response to a qualifying event.  Specifically, the withdrawal will relieve an “immediate and heavy financial need” of the employee, or the employee’s spouse, children or other dependents and can be used for:

  • Medical expenses
  • Expenses related to the purchase or repair a principal residence, or costs incurred to avoid eviction or foreclosure of a principal residence
  • Post-secondary education expenses, including tuition, fees and room and board (within the first 12 months of the withdrawal)
  • Funeral and burial expenses (including the parents of employee)

Source documents (work estimates, invoices, bills, etc.) or detailed summaries of the source documents will be required to verify that the hardship created an “immediate and heavy financial need”.  The memorandum advises agents to consider whether Plan Administrators followed these steps prior to making the hardship withdrawal:

  • Did the Administrator gather the appropriate source documents (estimates, invoices, receipts, etc.) and were these documents complete?
  • If summaries were provided in lieu of source documents, did the Administrator provide the employee with the notifications required on Attachment 1 of the Memorandum?
  • If summaries were provided, did the Administrator thoroughly examine the summaries to verify that the hardship withdrawal was substantiated?
  • If summaries were provided, do they detail the event(s) which caused the hardship, all of the costs incurred due to the hardship and a verification from the employee that the documentation provided is true and accurate?
  • Has the employee received more than two (2) hardship withdrawals in the current plan year?

Plan Sponsors that offer hardship withdrawals are reminded of these guidelines, and may wish to reference the IRS Memorandum on Substantiation Guidelines for Safe-Hardship Withdrawals to ensure a smooth 401(k) plan audit.

To determine if your 401(k) benefit plan is subject to an audit or for a consultation regarding your current 401(k) plan, contact JoAnn today.

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