Mar. 5th, 2015

Spotlight: Hardship Withdrawals – a New Pitfall

Carla Grant, CPA, Shareholder

Carla Grant, CPA, Shareholder

Many retirement plans allow employees to take distributions while still employed if they are experiencing a hardship. The regulations surrounding these distributions are numerous, and errors are often found during plan audits whether by the DOL, the IRS or independent accountants. Following are a few tips to help you understand your fiduciary responsibilities with regard to hardship withdrawals.

1. Understand what your plan has to say about valid hardship events. Most plans rely on the statutory definition of hardships, which include medical expenses, college tuition, prevention of foreclosure or eviction, and other specified events. A few plans allow the plan administrator or sponsor to decide what constitutes an “immediate and heavy financial need”.

2. Consider the amount of the hardship withdrawal. It may not exceed the amount needed to address the hardship, but may be increased to include the expected taxes owed on the distribution. Make sure that the tax calculation is reasonable.

3. Regulations require that the participant must have obtained any other distributions or loans available under the plan before receiving a hardship distribution.

4. The plan sponsor should obtain and retain evidence of the hardship. Both the IRS and the DOL have confirmed and emphasized this in recent public discussions. Upon audit the sponsor will be required to present such evidence. NOTE:  this is a recent development. If your plan currently requires only a signed verification by the employee, this is no longer enough. In fact, if this is the case you should probably go back and obtain proper documentation for all hardship distributions your plan has paid in the last three years.

5. Statutory provisions require that after receiving a hardship distribution an employee must stop making contributions to the plan for six months. A process should be in place to ensure that this requirement is met timely.

Hungerford Nichols can help!  Our talented retirement plan specialists can assist in reviewing plan document and regulatory requirements, performing tax calculations, and even collecting hardship and other data that is currently missing from plan fiduciary files. Contact Carla Grant (cgrant@hungerfordnichols.com) or Tricia Van Vliet (tvanvliet@hungerfordnichols.com) for more information.

When it comes to Employee Benefit Plans, Hungerford Nichols’ depth of experience will bring you peace of mind. You’ll get personalized service from our experienced staff and more value for your dollar. We’re proud of our track record for performing benefit plan audits in an efficient, cost-effective way. Our attention to detail and personal touch helps ensure minimal disruption to your staff during the auditing process.

The team at Hungerford Nichols provides the continuity and quality of service our clients require. The staff at Hungerford Nichols includes individuals with extensive knowledge of ERISA and auditing techniques.  We’ll also provide you with helpful ideas on how to increase your plan’s efficiency, improve plan administration and keep in compliance with complex regulations.

OUR SERVICES INCLUDE

  • Audit readiness services, including financial statement preparation
  • Audits of retirement and welfare benefit plan financial statements
  • Preparation of required Forms 5500
  • Preparation of other required tax returns, including Forms 990 and 990-T
  • Benefit plan design consultation services
  • Assistance with annual plan qualification testing