The Internal Revenue Service (IRS) issued a reminder to plan sponsors that “even if you use a third party administrator (TPA) to handle participant transactions, you’re still ultimately responsible for the proper administration of your retirement plan.”
In particular, the IRS highlighted the requirements of keeping up with recordkeeping of loans and hardship withdrawals, and furthermore, proving that those withdrawals comply with the law.
According to the IRS, files should include all of the following documents, in paper or electronic format, for each loan:
- Loan application along with evidence of the review and approval process
- An executed loan promissory note
- Documentation verifying if used for purchase/construction of primary home
- Evidence of loan payments
- Evidence of collection in the event of a default, and
- Form 1099-R in the event of a deemed distribution
Most important to remember as it pertains to loans is that if it is for a home purchase, the plan sponsor must obtain documentation prior to the loan being approved. The IRS stated they have found that plan administrators have allowed participants to self-certify, which is not allowed.
For hardship withdrawals, the plan sponsor should retain the following records, in paper or electronic format:
- Documentation of the hardship request, along with the review and approval
- Financial information and documentation that substantiates the employee’s “immediate and heavy financial need”
- Proof that the withdrawal was properly made in accordance with applicable plan provisions and the tax code, and
- Proof the actual distribution and the related 1099-R
The IRS cautioned that it is not sufficient for plan participants to keep their own records of hardship distributions. This also means that while it is okay for a participant to self-certify to show that a distribution was the only way to pay for the hardship, self-certification is not allowed to show the nature of the hardship.
The IRS also points out that failure to have these records on file for examination is itself a qualification failure that should be corrected using the Employee Plans Compliance Resolution System (EPCRS).
Plan Sponsor Considerations
It is imperative that plan sponsors understand it is their ultimate responsibility to keep all records for loans and hardship withdrawals.
It is also important to remember that self-certification is not allowed for loans for purchase of home or for proving the nature of the hardship. This guidance shows that the IRS will be reviewing these items as it expands its audit program. If plan sponsors find that there is not complete documentation, they must remedy the issue. This could include correcting failures through the EPCRS.
Lastly, plan sponsors may also consider whether the administrative burden and risk of continuing to offer these types of withdrawals is worth the perceived benefit. For many, they may find there are even more benefits to not allowing in-service withdrawals, such as greater retirement savings for their employees.