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Documenting Loans and Hardships


In their April 1, 2015 bulletin, the IRS reiterated the importance of employers who sponsor retirement plans (“plan sponsors”) to keep all records regarding the loans and hardship withdrawals provided under the plan. In many cases, employers delegate the responsibility for the review, approval, processing and tracking of loans and hardship withdrawals to their recordkeepers and third party administrators. However, the IRS made it clear that even though recordkeepers may be performing these functions on behalf of the plan sponsor, employers must still retain all of the records around these transactions.

For hardship withdrawals, the IRS recommends plan sponsors retain
the following:

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

For loans, the IRS recommends plan sponsors retain the following:

  • Evidence of the loan application, review and approval process;
  • An executed plan note;
  • If applicable, documentation verifying that the loan proceeds are being used to purchase or construct a primary residence should be obtained before the loan is approved;
  • Evidence of loan repayments; and
  • Evidence of collection activities associated with loans in default and the related Forms 1099-R, if applicable.

In the past, many employers have taken a hands-off approach to this process and left the recordkeepers to handle these transactions on their own with little to no oversight. In light of these new rule clarifications, employers may need to consider drafting their own hardship review procedures, reviewing and updating their loan procedures, establishing or updating their records retention policies to address these new documentation requirements and partner with their recordkeeping vendors to implement a process to archive these documents.

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