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Electronic Self-Certification for Hardship Distributions is Not Sufficient

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In its April 1, 2015 Employee Plans News, the IRS stated that defined contribution plan sponsors must maintain hardship distribution records and that plan sponsors cannot rely on electronic participant self-certification for hardship distributions.

The IRS indicated that plan sponsors should keep the following:

  • Documentation of the hardship request, review and approval;
  • Financial information that substantiates the employee’s immediate and heavy financial need;
  • Documentation to support the hardship distribution was properly made; and
  • Proof of the actual distribution made and the related Form 1099-R.

In recent years, a number of third party administrators have started offering an electronic self-certification in which participants may certify their own hardships and are required to maintain their own records of the hardship distribution.  In the Employee Plans News, the IRS indicated that allowing participants to self-certify a hardship and maintain the records is not sufficient because the records can be inaccessible in an IRS audit.

If your defined contribution plan currently permits employees to electronically self-certify hardship distributions, we suggest that you consider changing this process by requiring review and approval of all hardship distributions.  We also suggest that you consider maintaining proper documentation (either in paper or electronic format) surrounding each hardship distribution.