Technical Resources
The IRS has updated the content in its 401(k) Plan Fix-It Guide that addresses what to do when hardship distributions were not made properly.
The IRS makes recommendations regarding how to find and correct a mistake in providing hardship distributions.
How to Find the Mistake
- Review your plan document to determine if it allows hardship distributions, and review the plan’s procedures.
- Review all distributions made during the year and determine which may have been a hardship distribution.
- For each hardship distribution, make a determination whether each one met the hardship distribution requirements in the plan document.
- Look for abuse of the hardship feature; consider that if most hardship requests come from a specific group, some participants may be abusing the feature.
Fixing the Mistake
- Establish procedures for reviewing hardship applications if there are none.
- If the plan document doesn't allow for hardship distributions, but, in operation, hardship distributions do occur, correction may involve retroactively amending the plan in order to allow hardship distributions.
- If hardship distributions are made to participants that don’t meet the plan document hardship requirements or the 401(k) rules, then correction may involve a repayment to the plan of the amounts that didn’t meet the plan hardship requirements or the provisions of Code Section 401(k).
- The IRS also points out that self-correction is possible through its self-correction program, its voluntary correction program and the audit closing agreement program.
How to Avoid the Mistake
- Review the plan document language to determine when and under what circumstances distributions can be made.
- Make certain the language for hardship distributions is in the most recent document.
- Establish hardship distribution procedures working with a benefits professional to determine if these procedures are sufficient to avoid mistakes.
- Only allow hardship distributions that meet the plan document and Section 401(k) requirements.
- Look for signs that the hardship distribution program is being abused or badly managed. These may include:
- 1. Too many hardship requests by one group or division.
- 2. Requests for hardship distributions from multiple employees that appear identical.
- 3. Only the highly compensated employees have hardship distributions.
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