IRS memorandum outlines substantiation guidelines for safe-harbor hardship distributions

If your employee benefit plan allows hardship distributions under the safe-harbor standards, you will want to be aware of a recent IRS memo on this matter. On Feb. 23, 2017, the Internal Revenue Service (IRS) issued a memorandum to its examiners related to the substantiation records that plans should obtain and keep if they allow hardship distributions under the safe-harbor standards.

According to the memo, records should include: (1) documentation of the hardship request, review and approval (2) financial information and documentation that substantiates the immediate and heavy financial need of the employee (3) documentation to support that the hardship distribution was properly made in accordance with plan provisions and the Internal Revenue Code and (4) proof of the actual distribution made and related Forms 1099-R. The IRS memorandum addresses the records required to be maintained by the plan under number (2) above.

According to the IRS, self-certification by a participant is permitted to show that a distribution was the sole way to alleviate a hardship; however, it is insufficient to support the nature of the hardship. A plan must request and retain additional documentation of the hardship’s nature; it is not sufficient for the participant to keep their own records.

Failure of the plan to have adequate records available for IRS examination could result in a qualification failure that would require correction under the Employee Plans Compliance Resolution System (EPCRS). A copy of the memorandum is available on the IRS website.

Please contact a member of the KraftCPAs employee benefits team if you have questions about this or other issues related to your company’s retirement plan.

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