May 22, 2015
Authored by: benefitsbclp
What is the IRS thinking about when it announces that plan sponsors, even those using a qualified TPA/recordkeeper, should maintain the records for hardship distributions and participant loans?
401(k) plans particularly (although this applies to other types of qualified plans that permit participant loans) have been marketed and promoted to would-be participants as flexible retirement saving arrangements – so flexible that you can take your money back out without a problem either by borrowing it or by taking a hardship distribution. Depending on your perspective, this flexibility may be anathema to the notion of retirement savings, i.e., long-term savings and investing. America’s 401(k) saving structure is, in this respect, more “flexible” than arrangements in most other countries that have similar plan structures. The unfortunate result of this sort of flexibility is “leakage” – about which officials at Treasury and Labor seem concerned.
So, to beg the obvious question, did the IRS issue this “reminder” to plan sponsors because of its disdain for leakage? In view of the fact that the pronouncement tends to ignore how most 401(k) plans actually operate, one might certainly come to that conclusion.
The IRS says that, for hardship distributions, the plan sponsor (not its TPA) should retain these records in paper or electronic format:
- Documentation of the hardship request, review and approval
- Financial information and documentation that