Jun 1, 2015
The Internal Revenue Service (IRS) recently issued a publication regarding the requirement that qualified retirement plan
sponsors keep certain records in regards to hardship withdrawals and plan loans. In the publication, the IRS further indicated that failure to have these records available for examination is a qualification failure that should be corrected using the Employee Plans Compliance Resolution System (EPCRS).
For hardship withdrawals, plan sponsors 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
- Proof of the actual distribution made and related Forms 1099-R
With respect to records pertaining to #2 above (substantiating the employee’s immediate and heavy
financial need), the IRS has clarified that while documentation is required to show the nature of the hardship (e.g. certain medical expenses, costs relating to the purchase of a principal residence, tuition and related educational fees and expenses, etc.), plan sponsors may rely on a participant’s representation that he or she is experiencing an immediate and heavy financial need that cannot be relieved from other resources, unless the plan sponsor has actual knowledge that the participant has certain other means to meet such financial need.
If The Newport Group is delegated by the plan sponsor to determine a hardship, we will generally receive the supporting hardship documentation with the request and approve the hardship if it meets the IRS requirements. We require all required documentation to be supplied in advance for approval and retain the documentation post-approval.
If the plan sponsor does its own independent determination of a hardship, we do not require documentation to be sent with the request to disburse funds, with the understanding that the plan sponsor (i) has confirmed that the supporting documentation complies with the IRS requirements and (ii) has retained the documentation on file.
There has been some pushback within the retirement industry to this IRS publication—specifically that the document retention requirements are inconsistent with other information provided by the IRS. To date, there has been no formal response from the IRS to such pushback. Thus, we encourage our retirement plan clients to comply with this IRS publication.
For plan loans, plan sponsors should retain the following records in paper or electronic format:
Evidence of the loan application, review and approval process
- An executed plan loan note
- Documentation verifying that the loan proceeds were used to purchase or construct a primary residence, if applicable
- Evidence of loan repayments
- Evidence of collection activities associated with loans in default and the related Forms 1099-R, if applicable
Furthermore, if a participant requests a loan with a repayment period in excess of five years for the purposes of purchasing or constructing a primary residence, the plan sponsor must obtain documentation of the home purchase before the loan is approved and cannot rely on a participant’s representation in such a matter.
If Newport is delegated by the plan sponsor to approve a loan application, we require all required documentation to be supplied in advance for approval and retain the documentation post-approval.
You may view the IRS Publication here
. Should you have any questions, please contact your Newport representative.