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Hardship Withdrawal Documentation for Retirement Plan Administrators

As a retirement plan administrator, you may have the option for participants to take a 401k hardship withdrawal. Hardship withdrawals are designed to help qualified participants cover immediate and serious financial needs that arise, including a variety of qualifying expenses that fall into these four main categories:

  • Medical Care:  Costs for the employee, spouse, children or dependents, or primary beneficiary under the plan.
  • Homeownership: Expenses to buy or avoid eviction or foreclosure from the employee’s primary residence. If the employee qualifies for a casualty deduction under Section 165, costs to repair damages to the home.
  • Education: Expenses for tuition, fees, housing costs up to the next 12 months of post-secondary education for the employees and their spouses, kids or dependents, or the primary beneficiary under the plan.
  • Funerals: Expenses for funerals and burials for the employee’s deceased parents, spouse, children or dependents, or primary beneficiary under the plan.

When taking a hardship withdrawal from a  retirement plan, participants must provide documentation to prove that they need the money for the qualifying reason(s) requested.  This may come in a variety of formats, but it is essential that this information be collected and retained in your files.  In the event of a plan audit, you may need to prove that the hardship withdrawals that you approved were taken for valid reasons, so maintaining this documentation is vital.

Review 401k Hardship Withdrawal Documentation Carefully

Reviewing the supporting documentation received from a participant requesting a hardship tends to be what causes the most questions from everyone involved.  Participants are anxious to get the hardship approved and processed so that they can meet their financial needs, and there may be a temptation to try to help an employee in need by simply approving the hardship without first thoroughly reviewing the documentation.  This temptation should be resisted!  Making sure that hardships are only approved for valid and well documented reasons is an important part of the proper administration of your plan. 

Questions often arise as to what constitutes valid documentation of the hardship.  Although this is very much a facts and circumstances test for each individual case, there are some common questions that we see arising when it comes to evaluating hardship requests.  Medical expenses are the most often cited reason for taking a hardship withdrawal and the one that leads to be the most questions and confusion from all involved.  Given the complex nature of medical billing and insurance payment reporting, it is easy to understand why.  A participant may leave their doctor’s office with a bill in hand showing a balance due of $1,000.  Unfortunately, this will not necessarily qualify them for a $1,000 hardship.  That is because often invoices are issued by doctor’s offices before claims have even submitted to the insurance company (or companies) that may cover some or all of the charged amount.  Therefore, claims for medical expenses should include documentation of what the medical insurance covered and what the remaining balance is.

Required Information Needed for Hardship Withdrawals from Retirement Plans

In a recent memorandum for agents in the field conducting audits on retirement plans, acting director of employee plan examinations, Thomas Petit, outlined  the general information that’s required for hardship requests including the Participant’s name, the total cost of the hardship event,  the requested amount of the 401k hardship withdrawal request, and the participant’s  certification that they provided factual and honest information.  A completed hardship form will provide most of that information while the supporting documentation should provide the rest.  The memorandum went on to include specific information that should be included with the documentation for the various hardship reasons as outlined below:

 Hardship Documentation Should Include
Medical Expenses
  • Name of person who incurred the medical expenses (name)
  • Relationship to the participant (self, spouse, dependent, primary beneficiary under the plan…)
  • Purpose of medical care and the category of the expenses (not the actual condition). Examples: diagnosis, treatment, prevention, associated transportation, long term care
  • Name and address of the service provider (hospital, doctor/dentist/chiropractor.)
  • Amount of medical expenses not covered by insurance
Purchase of a Principal Residence
  • Information that demonstrates this will be the participant’s primary residence
  • Address  and purchase price of the principal residence
  • Types of costs and expenses covered (down-payment, closing costs and/or title fees)
  • Lender’s name and address
  • Purchase or sale agreement date and expected date of closing
Educational Payments
  • Name of the person that is receiving educational payments and  relationship to the participant
  • School’s name and address Categories of educational payments involved (post-high school tuition, related fees, room and board)
  • Period covered by the educational payments
** Note that educational expenses must be for the future and are limited to the next 12 months
Foreclosure/Eviction from principal residence
  • Must be for the participant’s principal residence
  • Address of the home
  • Type of event: eviction or foreclosure, and the date event happened
  • Name and address of the party that issued the eviction or foreclosure notice
  • Due date of the payment to avoid foreclosure or eviction
Funeral and Burial Expenses
  • Name of the deceased and date of death
  • Relationship to the participant
  • Name and address of the cemetery or funeral home/service provider
Repairs for Damage of Principal Residence
  • Is this the participant’s principal residence?
  • Address of the residence that sustained damage
  • Brief description of the casualty loss (fire, flooding, type of weather-related damage), cause of loss, date of loss
  • Brief description of the repairs, including the date(s) of repair (in process or completed)


Handling Outdated Hardship Documentation

One other problem that sometimes pops up when participants request a hardship is the submission of outdated supporting documentation.  The participant may provide a year-old explanation of benefits from their insurance company stating that they owe their healthcare provider for medical costs.  Before approving such a hardship, you should request a more up-to-date statement showing the amount due.  To make this easier and more consistent, it may make sense to implement a policy requiring any supporting documentation for a hardship to be dated within the past 90 days.   This will prevent the issue of approving hardships for bills that have already been paid. 
As with any other question related to your retirement plan, if you have any doubt about the documentation provided, or would like to learn more about hardship withdrawals, please contact a member of the Retirement Services team at C&N. Our goal is to create value through lifelong relationships and want to make retirement plan administration simple and easy for you.

401(k) is not FDIC insured, are not guaranteed by the institution and may lose value.