Plan Sponsor Guidance - Properly Documenting Plan Loans and Hardship Distributions

    Amy Barber, J.D.
    Director of Technical Services



    The Employee Plans News is a periodic newsletter kindly published by our friends at the IRS.  These newsletters in part, are intended to prompt practitioners and sponsors to consider certain issues that are on the IRS’ retirement plan radar.

    In the most recent newsletter (Issue No. 2015-4, April 1, 2015) there was nothing new in terms of regulatory requirements (no rule or interpretive changes).  Important though, was the highlighting of certain deficiencies (found during audit) relating to hardship withdrawals and plan loans.  These deficiencies stem primarily from allowing participants to “self-certify” their eligibility to obtain a hardship distribution or plan loan. 

    Given the prevalence of hardships and loans, the IRS is making it extra-clear (or maybe simply-clear for those who are surprised to learn) that (i) self-certification is not adequate documentation, and (ii) auditors are looking specifically at this issue.

    I Thought The IRS Allowed Participant Self-Certification?

    The IRS previously offered limited relief by relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions.  In IRS Announcement 2005-70, retirement plan participants were able to access money more quickly and with minimal upfront documentation due to Hurricane Katrina.  This relief was only provided from August 29, 2005 through March 31, 2006, and only to employees and certain members of their families who had a place of business or principal residence in the designated disaster area.

    In this limited circumstance, plan administrators were allowed to rely on employee self-certification.  Per the Announcement “Plan administrators may rely upon representations from the employee or former employee as to the need for and amount of a hardship distribution, unless the plan administrator has actual knowledge to the contrary, and such distribution is treated as a hardship distribution for all purposes under the Code and regulations.”  However, this relief was only provided if plan sponsors “as soon as practical” made a reasonable effort to assemble the required documentation.

    IRS Documentation Requirements

    The IRS specifically notes that using self-certification as the exclusive means of documentation is not sufficient.  For example, self-certification is permitted to show that a distribution was the only way to alleviate a hardship.  However, self-certification is not allowed to prove the nature of a hardship - and this means that plan sponsors must request and retain additional documentation to substantiate eligibility.

    Additionally, sponsors should note that it is impermissible for participants to self-certify their eligibility for certain loans.  If a participant requests a loan with a repayment period in excess of five years for the purchase or construction of a primary residence, the plan sponsor is required to obtain documentation before the loan is approved, and verify the loan proceeds were used for such purpose.

    Plan sponsors must retain documentation of hardship distributions and plan loans (in either paper or electronic format).  Hunting down records from participants is not a viable solution, as such records could be lost, non-existent, or inaccessible (for example, after they leave employment). 

    In the event of audit, sponsors must be able to provide:

    • Documentation of a hardship request, review and approval;
    • Financial information and documentation that substantiates the employee’s immediate and heavy financial need;
    • Documentation to support that the hardship distribution was properly made in accordance with the applicable plan provisions and the Internal Revenue Code; and
    • Proof of the actual distribution made and related Forms 1099-R.

    Sponsors should also keep documentation evidencing plan loan administration:

    • Evidence of the loan application, review and approval process;
    • An executed plan loan note;
    • Evidence of loan repayments; and
    • Evidence of collection activities associated with loans in default (and the related Forms 1099-R, if applicable).

    As noted in the newsletter “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).”


    Multnomah Group recommends that plan sponsors review outstanding hardship distributions and loans, to ensure the documentation satisfies IRS regulations. If lacking, sponsors should attempt to obtain necessary documents. In the event hardship distributions and/or loans have been made or administered improperly - sponsors might consider correction under EPCRS.

    Finally, many plan sponsors use a third party to handle these types of transactions.  However sponsors are ultimately responsible for the proper administration of the retirement plan – which includes the oversight of their vendors. Any sponsor utilizing a third party to process hardships and loans might want to consider reviewing their service agreement to determine if adequate language is included to ensure conformance with the regulations.

    For a link to the IRS Newsletter, click here.  


    Multnomah Group, Inc.
    Phone: (888) 559-0159
    Fax: (800) 997-3010

    Copyright 2015. Multnomah Group, Inc. All rights reserved.
    Information herein is provided for general informational purposes and not intended to be completely comprehensive regarding the particular subject matter. Multnomah Group does not represent, guarantee, or provide any warranties (express or implied) regarding the completeness, accuracy, or currency of information or its suitability for any particular purpose. Receipt of information does not create an adviser-client relationship between Multnomah Group and you. Neither Multnomah Group nor our advisory affiliates provide tax or legal advice or opinions. You should consult with your own tax or legal adviser for advice about your specific situation.