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The IRS has issued substantiation guidelines for Safe-Harbor distributions from 401k plans. The IRS is requiring that all hardship distributions are substantiated with proper documentation to be a valid hardship distribution.  The sponsor or administrator should have an annual report that provides the necessary data describing any hardship distributions that are made during the year and all corresponding documents that support and substantiate each claim.  RPA will work on behalf of its clients to collect and store all required documents to support the hardship claim in the event of an IRS audit.

We all know that generally, 401(k) plans may provide that an employee can receive a distribution of elective contributions from the plan on account of hardship. A distribution is made on account of hardship only of an immediate and heavy financial need of the employee and is necessary to satisfy the financial need.  The following are the qualifying reasons for a hardship distribution:

1. Expenses for medical care deductible for the employee or the employee’s spouse, children or dependents or primary beneficiary under the plan;

2. Costs directly related to the purchase of a principal residence;

3. Payment of tuition, related educational fees, room and board expenses for up to the next 12 months of post-secondary education for the employee or the employee’s spouse, children or dependents or primary beneficiary under the plan;

4. Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure of the mortgage on that residence;

5. Payments for burial or funeral expenses for the employee’s deceased parents, spouse, children or dependents or primary beneficiary under the plan; or

6. Expenses for the repair of damages to the employee’s principal residence that would qualify for the casualty deduction.

Substantiation that a distribution is for one of the above items is required to determine that a hardship distribution is deemed to be on account of an immediate and heavy financial need.

Please feel free to contact Retirement Plan Administrators with any questions you may have on hardship distributions or other retirement plan compliance questions.

To see the full IRS Memo please visit the following link https://www.irs.gov/pub/foia/ig/spder/tege-04-0217-0008.pdf