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IRS Broadens Applicability of Examination Guidelines for Documenting Hardship Distributions

The IRS has expanded the applicability of the examination guidelines relevant to hardship distributions from 401(k)s. On March 7 the IRS Tax Exempt and Government Entities Division issued a memorandum that sets forth substantiation guidelines for Employee Plans (EP) Examinations employees to use in examining whether a 403(b) plan safe-harbor hardship distribution is “deemed to be on account of an immediate and heavy financial need” in accordance with Treas. Reg. §1.401(k)-1(d)(3)(iii)(B). The memo is in force for two years, until March 7, 2019.

The memo says that because Treas. Reg. §1.403(b)-6(d)(2) provides that a hardship distribution from a 403(b) plan has the same meaning as a hardship distribution under Treas. Reg. §1.401(k)-1(d)(3) and is subject to the rules and restrictions under that portion of the income tax regulations, the 401(k) Memorandum and Attachment the IRS EP Examinations Office issued on Feb. 23, 2017 to its employees also apply to hardship distributions from 403(b) plans that are “deemed to be on account of an immediate and heavy financial need” under Treas. Reg. §1.401(k)-1(d)(3)(iii)(B).

The memo instructs EP employees that if they are examining a 403(b) plan’s hardship distributions and determine that all applicable requirements in the 401(k) Memorandum are satisfied, the 403(b) plan should be treated as satisfying the substantiation requirements for making hardship distributions deemed to be on account of an immediate and heavy financial need.

The memo is not a statement of law, nor is it formal guidance; rather, it is an internal communication to IRS employees and affords plan administrators, employers and those who serve 403(b) plans a look at how the IRS will approach hardship distributions from 403(b) plans. The memo does not address substantiation of non-safe-harbor distributions made from a 403(b) plan under Treas. Reg. §1.401(k)-1(d)(3)(iii)(A).