![]() ![]() Burial or funeral expenses for the participant’s deceased parent, spouse, child, dependent, or primary beneficiary.Payments necessary to prevent the participant’s eviction from, or foreclosure on, his or her principal residence.Tuition and related educational fees and room and board expenses for up to the next 12 months of post-secondary education for the participant or his or her spouse, children, dependents, or designated beneficiary.Costs relating to the purchase of the participant’s principal residence (excluding mortgage payments).Medical expenses for the participant, spouse, children, dependents, or his or her primary beneficiary, if they would be deductible under Code section 213(d), disregarding the requirement that they exceed 10% of adjusted gross income.As a result, most plans limit the qualifying events for a hardship distribution to this list: Those regulations provide for a “safe harbor” listing of events, all of which are deemed to meet the Internal Revenue Code’s requirements for hardship distributions, which makes the process of determining qualification for a hardship distribution easier for the plan administrator. Most pre-approved plans default to the Treasury Regulations’ safe harbor definition of a hardship. The employer cannot change the reasons for which hardships are granted without a plan amendment and doing so could affect the qualified status of the plan. In this case, when you wish upon a star, it makes no difference who you are. Sympathetic employers tend to forget that the plan cannot be changed to reflect their wishes regarding available hardships without a written amendment. The issuance of ineligible hardship distributions is another common error we find during our audits. Unfortunately, self-certification does not mean that an email or a phone call from the participant is sufficient. Thus, we continue to find instances in which neither backup nor compliant self-certifications were obtained for hardship distributions. Self-certification facilitates automation of the hardship approval by the recordkeeper however, electronic approval of hardship distribution requests through the plan webstation is not always the default. If self-certification is used, the employer must provide written notification of the taxability of the distribution, the rules regarding the definition of hardship and limitations, and the requirement that the participant maintain the backup. the participant can self-certify the hardship reason, amount, and financial necessity, in writing, including a statement that the information provided is truthful and accurate.backup documentation for the hardship reason and amount can still be required, or.To make matters worse, some large recordkeepers had erroneously taken the position that self-certification from participants was permissible, both by stating that there was no other financing available to meet the need and also for the hardship reason and amount. The reason is that every party involved thinks someone else is responsible for obtaining the backup, so nobody does it. Although obtaining documentation to substantiate a hardship is not, in itself, difficult, missing hardship backup is one of the most common operational errors we find during financial statement audits. ![]() Taking a hardship distribution should not be, in itself, a hardship to a participant going through challenging times, nor should it be an administration hardship to the employer trying to help. ![]()
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