Hardship and Participant Loan Documentation

The IRS recently published guidelines for Plan Sponsors to adhere to regarding the documentation of hardship distributions and participant loans.  Generally speaking, plan participants sign a distribution form certifying that they qualify for a hardship distribution.  However, this is not sufficient documentation.  Along with the distribution form, the proper documentation proving the financial need for the hardship, documentation that the hardship was made in accordance with the terms of the plan and a copy of the actual distribution and Form 1099-R must be retained by the Plan Sponsor.  In the event of an IRS audit, failure to provide these items is a qualification failure which must be corrected through EPCRS (Employee Plans Compliance Resolution System).

Complete and accurate documentation of participant loans is also the responsibility of the Plan Sponsor.  The loan application, including evidence of the review and approval process, the executed promissory note, proof that the loan was issued in accordance with the terms of the plan, proof of the loan repayments and proof of any collection attempts for defaulted loans, and related Form 1099-R must be kept on file.  If a plan loan is issued for the purchase of a primary residence, the participant must provide proof that they used the money for that purpose.

To read more about your documentation responsibilities as Plan Sponsor, please click here: http://www.irs.gov/Retirement-Plans/Its-Up-to-Plan-Sponsors-to-Track-Loans-Hardship-Distributions

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