The IRS has provided employers with some administrative relief to make it easier to offer loans and hardship distributions.
Delayed amendments – The IRS will allow plans that do not offer loans and hardship distributions to administratively adopt those provisions and then amend the plan no later than the end of the first plan starting after December 31, 2017. So, for a calendar plan year, this would be December 31, 2018. While we appreciate this relief, we recommend that plan sponsors promptly amend their plans for added provisions, preferably before permitting these distributions. Nova is available now to assist with plan amendments and updated SPDs. Delaying the amendment could lead to a situation where the amendment is not actually adopted or where the eventual amendment does not match what was done. Either of these could problems with a CPA, IRS or DOL audit. Nova is waiving amendment fees for plan sponsors who add these provisions.
Delayed documentation – The IRS is allowing the employer to delay collecting some documentation for loans and hardship distributions. An example of the documentation that may be delayed is obtaining spousal consent if spousal consent is required. If it is practical to do so, we urge employers to collect all documentation before processing a loan and distribution. Nova has found that it is impractical to collect documentation after the fact. First, employers move on and forget to get the documentation. Second, employees quit and it is very difficult to get the documentation once they no longer work for you. Unless it is a real hardship for the participant, we suggest getting all signatures and documentation upfront. If it is absolutely necessary to process a transaction without the documentation, make sure to put a tickler on your calendar.
Relaxed documentation and reasons for hardship distributions – The IRS is relaxing documentation requirements on Irma hardship distributions and is allowing participants to receive hardship distributions for just about any reason related to Hurricane Irma. Most hardship distribution requests we have seen thus far would qualify under the old hardship distributions and the employee was able to provide documentation for the request. So, this relief is often not necessary. Within the 401(k) community there is disagreement about what the relief on the hardship documentation means. Does it mean that participants do not have to provide any documentation or that participants ultimately have to provide documentation but not before receiving the distribution?
At a minimum, plan sponsors should collect a certification from the participant regarding their need. Nova suggests that plan sponsors collect whatever documentation is available prior to issuing the hardship distribution to avoid future issues. However, Nova is comfortable with relaxed standards with respect to the supplied documentation. For example, if a participant signs the need certification, provides pictures of their flooded home and requests $3,000 in a hardship distribution (because that is all they have in their account), we believe the documentation is sufficient. The pictures document the need and the amount is less than the typical cost of clean-up and repairs. We would not suggest requiring formal contractor estimates, a contract or estimate. Additionally, we would rely on the need certification and not require proof of no insurance or FEMA benefits. Given the amount requested, even if a participant had insurance or receives FEMA aid, they are likely to have at least $3,000 in unreimbursed expenses. If on the other hand, the requested hardship amount were $100,000, we would suggest trying to obtain additional documentation perhaps in the form of bids or at least an employee’s written estimate of the cost with the major elements detailed.
We suggest a common sense approach of striking a balance between getting as much documentation as reasonably possible and working with participants to process the distributions as soon as possible. If the documentation that is typically required is not available, get creative and work with the participant to get something that will document the file, but is not burdensome for them. Also, be in touch with Nova and the plan’s recordkeeper to understand if the plan’s recordkeeper is imposing the standard of collecting documentation later.
No suspension of 401(k) deferrals – Generally when a participant takes a hardship distribution, there is a requirement that their 401(k) contributions to the plan be stopped for six months. For Irma hardship distributions, there is not a requirement to apply this rule. While this sounds like a nice idea, it is a bit of an administrative quagmire. How can you tell which hardship distributions are Irma hardship distributions and which are not? Do your processes automatically stop 401(k) deferrals and how to do you stop those processes? Does the employee want the deferrals to stop? Nova suggests that regular hardship distribution requests be processed as regular hardship distributions unless the participant signs a “Irma Hardship Certification” form and that the form have a box for the employee to check whether or not they want their 401(k) deferrals stopped. This will draw a clear line between regular hardships and Irma hardships which will make it easier for employers to explain to any auditor in the future what was done. This will also minimize the number of Irma hardships to the lowest possible number.
Please contact us or your ERISA attorney with questions on the above.