The IRS recently issued an internal memorandum to provide guidance to its Employee Plans examiners who encounter a defined contribution plan that allows hardship distributions.
A plan sponsor can take the participant’s word that there is no other source of income to meet an “immediate and heavy financial need”, but the reason for that need and the amount needed must be substantiated by the plan sponsor before the distribution can be made. The memorandum describes what the examiner should look at to determine whether the sponsor did that.
The memorandum includes unusually succinct steps to determine whether documentation is sufficient to show that a hardship withdrawal meets the requirements. A particularly valuable portion of the memorandum is Attachment I, which a sponsor could easily provide to a participant seeking a hardship withdrawal, as a checklist of the necessary information and supporting documentation.
Remember that hardship withdrawals are not offered by all plans. Make sure your plan contains the proper provisions before offering this option to plan participants.
If your plan does offer hardship withdrawals, make sure you understand all the requirements before funds are distributed from the plan. Contact your IAI consultant with any questions.
The text of the memorandum is available on the IRS website.