Dive Brief:
- According to HRMorning.com, the IRS, in a newsletter, said that using a third-party administrator won’t protect plan sponsors if mistakes are made in the administration of their 401(k) plans. Specifically, the IRS looked to clarify some recordkeeping, hardship distribution, and plan loan rules.
- For hardship loans, the IRS said plans must retain four specific records (listed in the newsletter) for examination, should an audit be required. Plan administrators must request and retain documentation to show the existence and the nature of the hardship—such as a principal residence purchase agreement or receipts for medical care or funeral expenses.
- For plan loans, the IRS said plan sponsors must retain five specific records, which are listed in the IRS newseltter.
Dive Insight:
In all these cases, the IRS is clear on electronic self-certification—it's not permissible. The newsletter says IRS audits show that some TPAs allow participants to electronically self-certify that they satisfy the criteria to receive a hardship distribution.
While self-certification is permitted to show that a distribution was the sole way to alleviate a hardship, according to the IRS, self-certification is not allowed to show the nature of a hardship. Plan sponsors must request and retain additional documentation to show the nature of the hardship.
In short, plan sponsors are ultimately responsible for how their plans are run and can't use third-party administrator record-keeping mistakes as an excuse should the IRS come knocking.
