In a February 23, 2017 memorandum to its agents, the IRS did an about-face regarding the documentation that plan participants must provide to enable them to receive hardship withdrawals from their retirement plans.
Back in 2015, the IRS stated that employers should require and keep physical proof of the need for hardship withdrawals, such as medical bills, verification of foreclosure notices, purchase agreements for or casualty losses on a principal residence, and educational or funeral expenses. The purpose of this documentation was to protect the employer in the event of a retirement plan audit by the IRS.
The reason for this modification came about as more plan participants applied for hardship withdrawals on their administrators’ websites and provided summaries of their need for the funds; as a result, some employers failed to require the appropriate documentation. If a plan were then audited, some IRS agents weren’t satisfied that this “self-certification” was sufficient.
Under the new guidance, plan participants are responsible for maintaining their own records in support of their need for hardship withdrawals, in case their employers are audited by the IRS. Participants still must submit the reason for the hardship withdrawal. The third-party record-keeper or employer must send notices to employees that require employees to maintain the appropriate documents and to make the documents available at any time upon request.
Employers still have the option to require their plan participants to provide the previously required documentation before authorizing the hardship withdrawals.
Note: Hardship withdrawals are “document-driven;” i.e., the plan document must provide for hardship withdrawals. Also, before plan participants can avail themselves of hardship withdrawals, they usually must first take a loan from the plan (assuming the plan document allows for loans) and possibly prove that they have tried to obtain funding from other outside sources.