When I draw up a new 401(k) plan for a client, I tend to be liberal in distribution provisions by allowing loans, in-service distributions at 59 ½, and hardship distributions. I believe that there are situations where a participant really needs their 401(k) money and I think they should have access.
While I think they should have access, these types of distributions such as plan loans (I know it’s a loan and not really a distribution) can have administrative headaches. One of those headaches are hardship distributions and it’s imperative that plan sponsors get documentation from the participants requesting to make sure they have a real reason for the distribution.
The Internal Revenue Service has been looking at hardships as part of their audits and they want to make sure that the requests are documented with evidence of the financial need for a hardship. Plan sponsors just can’t take a participant’s word, they need backup.