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Loans to participants and distributions due to participant hardship are transactions commonly delegated by employee benefit plan management to third-party service providers. As service providers have increasingly streamlined their administrative processes in the increasingly paperless plan environment, the amount of documentation required by service providers supporting these transactions has been reduced, in some instances, to merely electronic certification (“e-certify”).

These streamlined administrative processes for loans and hardship distributions are coming under scrutiny by the Internal Revenue Service (IRS). The IRS has challenged the trend of service providers permitting participants to “self-certify” that they meet the applicable criteria for these loans and special early distributions and has specifically stated that the plan sponsor is responsible for the recordkeeping requirements regarding these transactions. Additionally, the sponsor may not rely on “e-certify” as sufficient evidence and should have documentation available for examination to support hardship distributions and participant loans. The IRS also indicates that a lack of electronic or paper records is a plan “qualification failure” that requires correction under the Employee Plans Compliance Resolution System (EPCRS).

Under IRS guidance, it is the responsibility of the plan sponsor to:

  • Maintain evidence of all relevant documentation for each participant loan (such as for the application and approval, the executed note receivable from participant, and repayments)
  • Document the nature of the hardship distribution (e.g., that it was a permitted distribution) even if the service provider only required the participant to “self-certify” that the hardship criteria were met.

For more details, refer to www.irs.gov/Retirement-Plans/Its-Up-to-Plan-Sponsors-to-Track-Loans-Hardship-Distributions.

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