Approving Hardship Distributions
If your plan allows participants to receive hardship distributions or loans for hardship purposes, the plan sponsor must (1) ensure the participant satisfies the requirements of a hardship distribution and (2) obtain documentation to support that claim.
The plan document sets forth specific criteria used to determine a hardship, such as medical or funeral expenses, payment of tuition, etc., and those rules must be applied objectively to all employees. The distribution may not exceed the amount of the need, but may include amounts required to pay any taxes or penalties that result from the distribution.
The employee’s need must be “immediate and heavy,” even if it was reasonably foreseeable or voluntarily incurred by the employee. If the employee has other resources available, including assets of the employee’s spouse and minor children, s/he does not have immediate and heavy need.
When a hardship distribution occurs, the plan sponsor is also required to suspend any employee contributions to the plan for at least six months.
When a participant submits a request for a hardship distribution, we will require a copy of the documentation for our records, but will rely on your review of the participant’s circumstances to ensure the request meets the definition of a hardship withdrawal. If you have any questions, please contact your plan consultant.