“Needs” Documentation for Hardship Withdrawals and Principal Residence Loans
Prior to article in the April issue of IRS’s Employee Plan News, there has been little direction from the IRS concerning the documentation requirements necessary to adjudicate hardship withdrawal claims and principal residence loans. This had led to some vendors permitting a participant to self-certify.
The IRS has had on its business plan a project to issue formal guidance on hardship substantiation. Since the formal guidance has not been provided, the article has taken many practitioners by surprise.
The article affirmatively indicates that a plan sponsor must receive and retain documentation from participants supporting the reason for a hardship distribution or a principal residence loan, including post-event proof. The article specifically states that electronic self-certification is not sufficient.
The article doesn’t have the effect of regulation or formal interpretation, but it may suggest the view the IRS would take on a plan examination or audit.
Fidelity has requested that the IRS withdraw or modify their informal guidance, given that there has been no formal position issued, and the fact that extensive documentation requirements would delay the time-sensitive need for funds endemic to hardship withdrawals and principal residence loans.
More developments on this topic should be forthcoming.