The standards for documentation on loans and hardships are “squishy,” and the American Retirement Association has some suggestions for the IRS on how to make things better – and that your plan sponsor clients will likely appreciate.
The comments from the American Retirement Association’s Government Affairs Committee (GAC) were provided in response to a request from the IRS to help clarify what is required of plan fiduciaries in ensuring that those plan distributions pass muster – a key concern since, as the IRS affirmed last year, a failure to do so could jeopardize the plan’s qualified status.
Generally speaking, the ARA’s recommendation boils down to two key areas: first that (particularly in view of the confusion that has existed to date on what is required, the IRS provide “liberal transitional relief for plan administrators who otherwise acted in good faith in the absence of clarifying guidance.”
And secondly, rather than try to craft something so specific that it might not be functional for all the varying situations and circumstances that a loan or hardship withdrawal might entail, to allow the plan sponsor to “reasonably rely on the representation from the employee” on certain aspects, “unless the plan administrator has actual knowledge or should have known from the surrounding facts and circumstances that the representation is untrue.”
Those aspects are that:
- The individual for whom the medical care expense that would be deductible under Code Section 213(d) is incurred is the employee, the employee’s spouse, or the employee’s dependent.
- 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.
- The residence for which the payments are necessary to prevent eviction or foreclosure is the employee’s principal residence.
- The individual for whom the payments for burial or funeral expenses are incurred are for the employee’s deceased parent, spouse, children, or dependents.
Finally, the comment letter recommends that with regard to the retention of the documentation that formed the basis for the determination, “scanned” copies or other electronically formatted copies may be maintained in lieu of the original documents.”
