Recently, the IRS posted clear and concise guidance to plan sponsors regarding their responsibility to maintain documentation supporting hardship distributions.  In short, the article on their website states “the plan sponsor must obtain and keep hardship distribution records.  Failure to have these records available for examination is a qualification failure that should be corrected using the Employee Plans Compliance Resolution System (“EPCRS”).”  The IRS also confirms that a participant may only self-certify that the distribution was the only way for them to alleviate a hardship.  They can’t self-certify the nature of the hardship.

Similar guidance on obtaining and retaining loan documentation was also provided.

This posting has caused quite a stir in the retirement plan community, with at least one large third party administrator asking the IRS to withdraw or modify its article believing that the content is not supported by IRS regulations and is contrary to guidance provided by IRS representatives.

While attending employee benefit plan conferences, we have heard representatives from the IRS state that plan sponsors should obtain documentation for hardship distributions, and have it available for review upon examination.  As a best practice, we continue to recommend that plan management obtain, review and retain copies of hardship documentation for all hardship distributions.

http://www.irs.gov/Retirement-Plans/Its-Up-to-Plan-Sponsors-to-Track-Loans-Hardship-Distributions