Over the past 26 years of working with healthcare clients, I can’t remember a year where I received more phone calls from participants in retirement plans requesting a distribution due to financial hardship than last year.
Upon receiving such a call, we would educate the client’s staff member on the consequences of a plan distribution prior to age 59 ½, but often a “hardship distribution” was their only option.
Some of the phone calls, though, resulted in having to refuse the request.
Why?
Because the employee couldn’t substantiate or verify the hardship.
Warner, Norcross, & Judd, a local law firm in Grand Rapids Michigan, recently sent out a question and answer summary of this topic that I thought would be worth sharing with you for the next time you are presented with an employee requesting a distribution from your retirement plan for a “financial hardship.”
Here is a paraphrased version:
Q: What documentation do I need to verify that an employee has experienced an event that qualifies as a safe harbor hardship under our 401(k) plan?
A: While the Internal Revenue Service doesn’t have specific rules for what documentation is needed, a hardship distribution should only be made if the employee has demonstrated the occurrence of the event. Having the employee fill out a form and simply check a box that they have incurred a hardship is not sufficient: you need to have some form of documentation. So, what could you use?
Medical Expenses: Ask for a copy of the medical bill, along with a denial from the insurance company, or a letter from the health care provider verifying the need for the treatment and a summary of the out-of-pocket costs.
Purchase of principal residence: Request a signed purchase agreement.
Twelve months future tuition and related costs: Obtain a bill or letter from the educational institution that outlines the tuition, room, board and related expenses for the student enrolled.
Payments to prevent eviction or foreclosure on the principal residence: Have the employee submit to you the formal legal document giving notice of overdue rent or mortgage payments that will result in eviction or foreclosure proceedings, if not paid by a certain date.
Burial or funeral expenses: Get a copy of a death certificate and funeral home bill.
Repair of casualty losses to a principal residence: Gather evidence of a casualty loss, a repair bill and proof that the expenses were not covered by an insurance company.
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