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Your Recordkeeping Responsibility for Hardship Withdrawals and Participant Loans

See which records you are responsible for maintaining in the event of hardship withdrawals and participant loans taken from your retirement plan.

Apr 20, 2015

BPAS-4-20-15-Records

Every year at this time, I take my shoe-box full of receipts, statements and W-2 forms to my accountant’s office so he can prepare my tax returns.  And, every year after he finalizes my return, he sends me back home with the same shoe box. I must admit that I am tempted to dump the shoe box and its contents into the nearest trash receptacle. After all, my accountant is responsible for the information on my tax form, isn’t he?

Unfortunately, the answer is no. The taxpayer is ultimately responsible for the information reflected on the return and for the records supporting such information.

Who is Responsible for My Retirement Documentation?

The same is true with retirement plans. In guidance recently issued, the IRS clarified that it is the responsibility of the Plan Sponsor to maintain records supporting the issuance of participant loans and hardship withdrawals.

Many plan sponsors have erroneously assumed that the responsibility for this documentation resides with either their Third Party Administrator or the Participant involved with the transaction.  That is not the case.

IRS Guidelines for Participant Loans and Hardship Withdrawal Records

To ensure  you are meeting your responsibilities with regard to supporting documentation, the IRS recommends that you maintain all of the following items in paper or electronic format for participant loans and hardship withdrawals.

Hardship Withdrawals

Participant Loans

Documentation of the hardship request, review and approval. Evidence of the loan application, review and approval process.
Financial information and documentation that substantiates the employee’s immediate and heavy financial need. An executed plan loan note.
Documentation to support that the hardship distribution was properly made in accordance with the applicable plan provisions and the Internal Revenue Code. If applicable, documentation verifying that the loan proceeds were used to purchase or construct a primary residence
Proof of the actual distribution made and related Forms 1099-R. Evidence of loan repayments.
Evidence of collection activities associated with loans in default and the related Forms 1099-R, if applicable.

Plan Sponsors using BPAS recordkeeping and consulting services can rest easy. We maintain this required information for each hardship withdrawal and participant loan and archive the records for easy retrieval should the need arise. However, we highly recommend that Plan Sponsors maintain the same information in their records.

If you are concerned that your plan records may not  contain sufficient information to support previously processed hardship withdrawals or participant loans, please contact your BPAS plan consultant to help remedy the situation.