Documenting Hardship Distributions

The IRS recently published a memorandum outlining new audit procedures for use by agents verifying whether a plan has followed proper substantiation procedures for safe harbor hardship withdrawals. To view the memorandum and the related Attachment, go to https://www.irs.gov/pub/foia/ig/spder/tege-04-0217-0008.pdf.  Plan sponsors may want to review these procedures to anticipate later possible objections to their hardship withdrawal programs.

According to the memorandum, the auditor must determine whether the sponsor — to substantiate the hardship — relied on specific source documents (such as estimates, contracts, bills, etc.) or a “summary” of information on those documents. If source documents were used, the auditor is to determine whether they substantiate the hardship. In the latter case, the auditor is further required to determine whether the summary information obtained from the employee conforms to the requirements set forth in the Attachment to the memorandum.

The Attachment lists information that must have been provided to the employee, such as notification that the distribution is taxable, that it may not exceed the amount of the immediate and heavy financial need, and that the employee agrees to maintain the underlying source documents and provide them upon request.

The Attachment also identifies the specific, detailed information that the IRS deems necessary to substantiate particular types of safe harbor hardship distributions. For example, for funeral and burial expenses, the summary must include the name of the deceased, his or her relationship to the participant and date of death, and the name and address of the service provider. Similar lists are provided for the other five types of safe harbor hardship withdrawals.