When it comes to hardship distributions, I actually review the reasons for it and want to see the backup for it because a hardship distribution is for an actual hardship and it’s not some sort of ATM machine when a participant needs money.
When a bundled provider created a hardship distribution program where a plan sponsor didn’t need anymore backup, I had a problem with him because I believed that the Internal Revenue Service (IRS) would clamp down and review whether distributions were appropriate or not.
Apparently, IRS auditors received a new memorandum which sets standards on whether a 401(k) hardship distribution is for an immediate and heavy financial standard, which has always been the standards set in the regulations.
What does this mean? It means auditors will be reviewing hardship distributions for every 401(k) audit they do, so plan sponsors need to make sure they have the documents to back up any hardship request. Auditors will need to find out whether the plan sponsor or a plan provider has backup from the plan participant that documents that financial need. In addition, they will look at participants who request multiple hardships within a year and see the materials used to substantiate the hardship claim.
The days where a plan sponsor was lackadaisical in verifying hardship claims are over.