[co-author: Sara Van Houten]

In a previous blog, we addressed an issue of Employee Plans News in which the IRS took the position that 401(k) plan administrators must maintain hardship distribution records and should not rely on electronic participant self-certification for hardship distributions.

On February 23, 2017, the IRS issued a memorandum to its Employee Plans Examiners that sets forth substantiation guidelines for the examination of 401(k) hardship distributions.  The memorandum provides that a plan administrator may maintain either of the following to establish a participant’s need for a hardship distribution: (1) source documents that support the need for the hardship distribution or (2) a summary of the information contained in the source documents.

Source documents include items such as the original health care bills, signed purchase agreements for the purchase of a principal residence, bills from an educational institution and similar documentation. The summary is designed to be a summary of the source documents.

The memorandum describes the content of the summary that a plan administrator must maintain as substantiation of a hardship distribution and it also sets forth what information must be provided to the employee requesting the hardship distribution. For example, the plan administrator must notify the participant that he/she must retain the source documents and make them available upon request.  The content of the notice and summary requirements are described more fully in an attachment to the memorandum.

The IRS memorandum marks a change from the position the IRS articulated in its prior informal guidance on this issue. It is welcome news for many plan administrators as it provides them with additional flexibility in their efforts to document requests for hardship distributions. However, it also seems clear that the IRS still does not countenance a participant’s electronic self-certification for hardship distributions without at least some substantiation.