Kaplan: Tread Carefully with Hardship Distributions

By John Iekel • October 18, 2015 • 0 Comments

Hardship distributions are intended to serve as an emergency source of revenue to meet an immediate need. But they are not a panacea and are not to be taken lightly — by plan participants and their employers. Robert M. Kaplan, Vice President, National Training Consultant at Voya Financial, offered insights and pointers on hardship distributions at an Oct. 18 workshop at the 2015 ASPPA Annual Conference held in National Harbor, Md. just outside our Nation’s Capital. 

As with employee benefits plans, which are not a mandatory offering by employers, employers are not required to make it possible for participants in their plans to take hardship distributions from their retirement accounts, nor plan loans. Still, most do — Kaplan cited statistics saying that 88% do make hardship distributions available, and 88% make plan loans available, as well. 

And as with employee benefits plans, which also are not a mandatory offering by employers, once an employer makes them available rules kick in. But everything is not cut and dried — there still is room for individual judgment regarding specific circumstances. 

In fact, judgment and circumstances can play a crucial role. So critical are they that a plan may substitute facts and circumstances for the safe harbor reasons the IRS enumerates for such distributions. 

Kaplan offered a suggestion by which employers could head off complications before they arise, suggesting that “We should educate individuals on potential ramifications” of such distributions and loans. 

Communication also is a key consideration. Kaplan stressed that what participants are told about what the plan says about plan loans and hardship distributions should line up with what the summary plan description says. And he added that an employer should “document, document, document” plan procedures. 

Another step that can be taken is to print and bring IRS regulations and guidance to meetings or discussions with participants and clients to discuss their questions about distributions and loans, as well as the challenges surrounding them. 

And an employer should remember that an employee’s word regarding the need for a hardship distribution is insufficient — there has to be some way to prove it. “You just can’t take their word for it,” Kaplan said, adding “self-certification is not acceptable.”

You'll find our other coverage of the 2015 ASPPA Annual Conference in the Conferences "station" on ASPPA Net.