ARA Files Comment Letter on Substantiating Hardship Distributions and Participant Loans
The American Retirement Association Government Affairs Committee on Dec. 2 filed comments
with the IRS providing recommendations on the documentation needed to substantiate a hardship distribution or participant loan.
The ARA says in the letter that it generally agrees with the IRS that there should be documentation allowing such distributions and loans; however, it is “reluctant to support any specific standard as to what exactly is needed to document a hardship distribution claim (or loan application)” and that because so many facts and circumstances may be relevant, it would be difficult to arrive at a specific standard that would accommodate the many variables a plan administration may consider.
In the letter, the ARA says that it recognizes that the IRS has not issued formal guidance regarding the substantiation and documentation required in order to make a hardship distribution or participant loan from an employer-sponsored retirement plan. However, it notes that the IRS has provided sub-regulatory and informal guidance on this issue.
The absence of formal guidance, the ARA says, has created uncertainty regarding industry practices and procedures that have arisen concerning the processing of hardship distributions and participant loans. The ARA says that it appreciates the opportunity to work with the IRS on clarifying best practices that will help ensure that plans are being operated in accordance with the Internal Revenue Code’s qualification requirements.
In the letter, the ARA notes that it previously has commented that the IRS should make it a high priority to issue guidance on the recordkeeping requirements that plan sponsors must satisfy to properly document hardship distributions, and that other industry groups have made similar requests. “Because the Service has emphasized that the plan sponsor is still ultimately responsible for the proper administration of the retirement plan even where a third party administrator handles participant transactions, ensuring that plan sponsors have sufficient information regarding these requirements is critical to ensure compliance,” says the letter.
Because of the confusion that exists, the ARA recommends that the IRS clarify standards for documentation, which it says could come as sub-regulatory guidance in order to expedite resolution of the issue. The letter adds that the ARA suggests the IRS “provide liberal transitional relief for plan administrators who otherwise acted in good faith in the absence of clarifying guidance.”
The ARA also recommends that the IRS issue guidance permitting a plan administrator (as defined under ERISA Section 3(16) ) or the plan administrator’s delegate to reasonably rely on the representation from the employee regarding the following items, unless the plan administrator has actual knowledge or should have known from the surrounding facts and circumstances that the representation is untrue:
1. the individual for whom the medical care expense that would be deductible under Internal Revenue Code Section 213(d) is incurred is the employee, the employee’s spouse or the employee’s dependent;
2. the individual for whom the payments for tuition, related educational fees, and room and board expenses, for the next 12 months of post-secondary education are being made are for the employee, the employee’s spouse, the employee’s children, or the employee’s dependents;
3. the residence for which the payments are necessary to prevent eviction or foreclosure is the employee’s principal residence; and
4. the individual for whom the payments for burial or funeral expenses are incurred are for the employee’s deceased parent, spouse, children or dependents.