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It's up to plan sponsors to track loans, hardship distributions

 

Even if you use a third party administrator (TPA) to handle participant transactions, you¡¯re still ultimately responsible for the proper administration of your retirement plan. Make sure you¡¯re keeping up with the recordkeeping requirements.

Hardship distributions

  1. Traditional substantiation method

    Plan sponsors should obtain and keep hardship distribution records. Failing to have these records available for examination is a qualification failure that should be corrected using the Employee Plans Compliance Resolution System (EPCRS).

    Keep these records in paper or electronic format:

    It¡¯s insufficient for plan participants to keep their own records of hardship distributions unless the ¡®Summary substantiation method¡¯ (below) for "safe-harbor" hardship distributions is used.

    • Documentation of the hardship request, review and approval.
    • Financial information and documentation that substantiates the employee¡¯s immediate and heavy financial need.
    • Documentation to support that the hardship distribution was properly made according to applicable plan provisions and the Internal Revenue Code.
    • Proof of the actual distribution made and related Forms 1099-R.
       

  2. Summary substantiation method for safe-harbor hardship distributions

Plan loans

A plan sponsor should retain these records, in paper or electronic format, for each plan loan granted to a participant:

  1. Evidence of the loan application, review and approval process.
  2. An executed plan loan note.
  3. If applicable, documentation verifying that the loan proceeds were used to purchase or construct a primary residence.
  4. Evidence of loan repayments.
  5. Evidence of collection activities for defaulted loans and related Forms 1099-R, if applicable.

If a participant requests a loan with a repayment period in excess of five years for the purpose of purchasing or constructing a primary residence, the plan sponsor must obtain documentation of the home purchase before the loan is approved. IRS audits have found that some plan administrators impermissibly allowed participants to self-certify their eligibility for these loans.

Related

Page Last Reviewed or Updated: 08-Apr-2025