How Does your TPA Handle Hardship Withdrawal and Loan Documents?

Chris Allesee

No plan sponsor wants to constantly look over the shoulder of its plan’s third party administrator (“TPA”) regarding matters of routine administration. However, if your plan allows participant loans and hardship withdrawals, the IRS reminded us in a recent bulletin that it may be worth taking a quick glance to see how your TPA handles these transactions. Ultimately, you are responsible for ensuring that participants complete all the necessary paperwork to receive a loan or hardship withdrawal, and for maintaining that documentation, even if your TPA manages the entire process on behalf of your plan. The bulletin provides a convenient list of the documents that must be completed and maintained for each transaction, including applications, approvals, loan documents, and any Form 1099-R issued to a participant.

The IRS also takes the position in the bulletin that a participant may not electronically self-certify that a loan will be used to purchase a home or that the participant has experienced a hardship for a hardship withdrawal. Rather, a participant must provide documents supporting the purchase of the home or the hardship before the transaction may be approved. If you cannot produce these documents (or the other required documents) to the IRS during an audit, you may have to go through the IRS’s correction program to avoid plan disqualification and/or issue a Form 1099 to your unsuspecting participants. You can save yourself some trouble now by taking a minute to talk to your TPA about your plan’s loan and hardship procedures to make sure the TPA requests and maintains all necessary documents, and that they are accessible to you on demand.