IRS Extends New Guidelines for Documenting Hardship Distributions to Section 403(b) Plans
March 24, 2017
By Peter Alwardt, CPA
On March 7, 2017, the IRS issued a memorandum to field agents extending its new guidelines related to documentation considered as acceptable substantiation of a hardship distribution from an Internal Revenue Code (“IRC”) section 401(k) plan to section 403(b) plans, which may also provide for hardship distributions to plan participants. The guidance applies only to whether a 403(b) plan hardship distribution is “deemed to be on account of an immediate and heavy financial need” under the safe-harbor standards provided in the section 403(b) regulations, which mirror the section 401(k) regulations. It does not apply to the substantiation requirements of non-safe-harbor hardship distributions under section 403(b).
On February 23, 2017, the IRS issued substantiation guidelines for safe-harbor distributions from section 401(k) plans to field agents, which stated that a summary of information provided by a participant to the employer or a third-party administrator could be used to substantiate a safe-harbor hardship distribution deemed to be on account of an immediate and heavy financial need. An attachment to the guidelines provided a list of information that was required for the summary of information for each of the deemed hardship events under the regulations. Additionally, the attachment provided that the employer or third-party administrator needed to provide certain notifications to the participant prior to making a hardship distribution.
Because the section 403(b) regulations provide that a hardship distribution for purposes of a section 403(b) plan has the same meaning as a distribution on account of hardship under the section 401(k) regulations and is subject to the same rules and restrictions, the IRS has applied the guidelines from its February 23 memorandum and the related attachment to hardship distributions from section 403(b) plans that meet the criteria.
Agents are instructed that if, during an examination of a section 403(b) plan, they are reviewing hardship distributions to determine whether they are made on account of a deemed immediate and heavy financial need, they should follow the steps set forth in the 401(k) memorandum. If they determine that all applicable requirements in the 401(k) memorandum are satisfied, the section 403(b) plan should be treated as satisfying the substantiation requirements.
The IRS memorandum provides useful information regarding the documentation that employers should be obtaining and retaining to demonstrate that hardship distributions made by their 403(b) plan were on account of an immediate and heavy financial need. Employers should review their hardship documentation procedures in light of the IRS memorandum to confirm that the documentation being obtained is adequate for substantiating an employee’s hardship.
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