Hardship Withdrawal Documentation for Retirement Plan Administrators
- Business Ownership
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|
|Purchase of a Principal Residence||
|Foreclosure/Eviction from principal residence||
|Funeral and Burial Expenses||
|Repairs for Damage of Principal Residence||
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.