Benefit Plan Distributions Part 1

It’s expected that participants will provide documentation leading up to their distribution — but approving and filing these documents is often more convoluted.


Who’s Responsible for an Employee’s Hardship Documentation?

  • Lisa Cushman
  • 8/28/2017

Update: 9/22/2017
In light of the recent hurricanes and earthquakes across the country, natural disaster relief is available through many employee benefit plans. Employers should take note that with this relief:

  • Procedural and administrative rules for hardship withdrawals or loans to participants are relaxed.
  • Family members outside the affected areas are allowed to request hardship withdrawals or loans to assist certain family members who live or work in the affected areas.
  • The six-month ban on 401(k) and 403(b) contributions will not apply for hardship distributions.
  • Participant loans or hardship distributions can be distributed before the plan is formally amended to provide for such features. However, the plan must be amended by a specified date.

For more information on hurricane relief, review specific details from the IRS.

Employers located in a county identified for individual assistance by the Federal Emergency Management Agency should review the DOL EBSA Disaster Relief webpage for DOL Compliance Guidance for more applicable information.

A participant of your plan may someday fall into a time of financial hardship. In these situations, a hardship distribution from a 401(k) or 403(b) plan may be taken if it is included in your organization’s plan document.

Hardship distributions are taxable to the participant, are not paid back to the participant’s account, and are only available up to the amount necessary to satisfy the financial need. But before receiving a distribution, the participant must first provide documentation to your organization demonstrating that there is an “immediate and heavy” financial need — and your institution must review and keep track of it.

Allowable expenses for distribution

  • Distribution amounts can only be used for allowable expenses, including:
  • Certain medical expenses
  • Costs related to buying a principal residence
  • Tuition and related educational fees for post-secondary education
  • Payments necessary to prevent eviction or foreclosure on principal residence
  • Burial or funeral expenses
  • Expenses caused by damage to a primary residence

Plan sponsors must review and file supporting documentation

For a hardship distribution to qualify, the employee must provide supporting documents to prove:

  1. The financial hardship exists
  2. There are no other means of alleviating the hardship

Financial hardships can be evidenced by either source documents, such as an eviction notice, a medical bill, or a closing statement for the purchase of a home, or a summary of information compiled from source documents and self-certified by the participant. If self-certifying, the participant must compile a summary with enough detail to support the need. In the past, there was a widely-assumed belief that a plan participant’s self-certification met all required documentation requirements.

While IRS regulations allow plan participants to self-certify that they satisfy the criteria to receive a hardship distribution, participants are not allowed to self-certify the nature of their hardship. This means that a plan administrator must still verify that the nature of the hardship is allowable. The documentation required to support a hardship differs based on the specific type of financial need. If an employer has granted a hardship distribution without requiring and maintaining the evidence validating the reason and the amount, it is considered a qualification failure.

Before distribution, make participant aware of requirements

Regardless of how the supporting documentation is provided, plan sponsors must notify the participant that:

  • Hardships are taxable
  • The distribution cannot exceed the financial need
  • Hardships cannot be made from earnings on elective contributions or from qualified non-elective contributions (QNEC) or qualified matching contributions (QMAC) accounts (if applicable)
  • The participant must keep source documents and make them available if requested

Enforce rules after the distribution

Once the hardship distribution has been made, many plans include provisions stating that the employee cannot contribute to the plan or any other employer-sponsored plan for at least six months from the date of the distribution. Review your plan to determine if your plan has a similar restriction and. if so, inform the employee of those provisions and enforce them in your organization.

How we can help

CliftonLarsonAllen (CLA) can help you evaluate your benefit plan to determine if your past activity has been in compliance with these rules. If a qualification failure has occurred, our professionals can help you submit corrections through the IRS. We can also help you create a system for keeping track of distribution documentation and prepare you to enforce post-distribution rules moving forward.

Read more about plan distribution options and responsibilities.