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Monthly Archives: February 2016

Manage Identity Theft with Expert Assistance by Dustin Grizzle

Posted on February 29, 2016 by Dustin Grizzle

Not a day goes by without news of another data breach that comprised consumers’ personal information. Most recently, the IRS detected thieves attempting to access its system in an effort to generate PINs and file bogus tax returns for more than 100,000 taxpayers.

Despite the safeguards individuals and businesses employ to protect the personal information about themselves and their customers, identity theft fraud continues to be a real and serious threat. This is especially true in Florida, which continues its reign as the state with the highest per capita rate of reported identity theft complaints, which does not include the countless number of cases that go unreported.

All-too-often, identity theft goes unnoticed for months or even years after criminals first steal an individual’s data. For many unsuspecting victims, the first hint of theft occurs when they attempt to file their annual tax returns and instead get a rejection notice from the IRS. It is at this point that taxpayers discover that someone else has filed a return under their Social Security Number, typically in an attempt to intercept a tax refund.  Other common schemes involve criminals stealing victims’ Social Security numbers to fraudulently apply for jobs, receive government benefits or secure credit.

When individuals detect they may have been a victim of tax-return identity theft, they should not attempt to remedy the matter on their own. Rather, they should contact their accountants, who understand the IRS’s processes and have the experience and ability to manage these issues more easily and more swiftly than the average person. That’s not to say that complete resolution of the matter will be achieved within days. Identity theft victims should be prepared for a lengthy process that will require the additional filings of specific IRS forms to prove one’s identity, agency investigations and new procedures and safeguards for protecting victims’ from fraud in the future.

As an added layer of protection against identity theft, the IRS recently introduced the Identity Protection Personal Identification Number (IP PIN) program, which assigns eligible taxpayers with a six-digit number they must use to confirm their identities and validate their social security numbers when filing federal tax returns. Taxpayers who receive IP PINs should include the digits on tax returns filed either on paper or electronically. Those who use the IRS’s e-file program should note that their IP-PINs are separate from their five-digit e-file PINs.

Currently, IP PINS are available only to taxpayers who have been victims of identity theft or who reside in Florida Georgia or the District of Columbia, where the IRS is conducting pilot programs.

If you suspect you were a victim of tax-related identity theft, remember to follow these steps:

  1. Call your tax accountant.
  2. Complete and file Form 14039, Identity Theft Affidavit along with two forms of government-issued ID to alert the IRS that you are or may be a potential future victim of identity theft tax fraud.
  3. File paper tax returns for the current year.
  4. Be patient as the IRS conducts an investigation.
  5. Carefully review bills and financial accounts to detect unauthorized charges or withdrawals.
  6. Get a copy of your credit report to identify suspicious activity, which may include inquiries into your credit history, inaccurate personal data or unauthorized credit cards.

About the Author: Dustin Grizzle is a senior manager in Berkowitz Pollack Brant’s Tax Services practice, where he provides tax planning and compliance services to businesses and high-net-worth individuals. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at


5 Tax Considerations when Hiring Domestic Workers by Joanie B. Stein, CPA

Posted on February 23, 2016 by Joanie Stein

Families are often unaware of the tax and legal implication that come with hiring housekeepers, nannies, caregivers, chefs, drivers or other workers that perform services in or around their homes. In fact, hiring someone to help around the home and improve one’s life may actually result in a complex web of tax regulations. Following are five issues that families should consider before hiring a domestic worker.


Employee or Independent Contractor. According to the IRS, domestic workers are considered employees, subject to payroll, tax and labor laws, when a member of the hiring family can control what work is done, how it is done and when it is performed. It does not matter how many hours the employee works or how he or she is paid. If workers derive a significant portion of their income from the work and the job has some level of permanence, they are employees.


Conversely, workers will not be considered employees when their services are available to the general public or when they use their own tools to perform the services, in which case they may be considered independent contractors.   Workers hired through an agency that directs how and when work is to be performed, will also not be considered employees of the hiring family.


Paying Individually or Through a Family Business. While it may be tempting to pay a domestic employee through a business account and claim the tax deduction on the payroll expense, such an action is illegal. Rather, families should apply with the IRS for an employer identification number (EIN) and be prepared to meet the legal and financial responsibilities that come with hiring an employee, including keeping accurate records of hours worked, paying employment taxes and filing required paperwork, including W-2s and Schedule H, Household Employment Taxes, of IRS Form 1040 with their federal income tax returns.


Overtime Pay. Under the Fair Labor Standards Act (FLSA), household employees are considered non-exempt workers entitled to overtime pay for hours worked in excess of a 40-hour workweek. The overtime rate is calculated as 1.5 times the regular hourly rate of pay.  More specifically, the FLSA cites the overtime rules apply to housekeepers, chauffeurs, cooks and full-time babysitters working more than eight hours a day for one or more employers. Exempt workers include “casual” babysitters and “companions” for the elderly as well as domestic workers who live in employers’ homes, such as full-time nannies.


Families that fail to meet the overtime rules expose themselves to the risk of wage disputes and the expense of back wages, taxes, penalties and interest, as well as legal counsel.


Employment Taxes. When a domestic worker is classified as an employee, the hiring family should be prepared to withhold and pay Social Security and Medicare taxes as well as unemployment taxes at the federal level and at the state level, when applicable.


Available Tax Credit. Families that hire a housekeeper, nanny or aide to care for a child under the age of 13 or a spouse or dependent who is unable to care for themselves may qualify for a credit for child and dependent care expenses. To claim the credit, the employee must provide care so that the taxpayer may work or look for work.


Hiring a worker to provide services in and around one’s home requires families to consider a broad range of personal, legal and financial issues. The advisors and accountants with Berkowitz Pollack Brant understand these challenges and work with families to take the steps required to make the process as simple and tax efficient as possible.


About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she provides individuals and businesses with strategic estate and tax planning counsel. She can be reached in the CPA firm’s Miami office at 305-379-7000 or at



Employers Welcome Affordable Care Act Cadillac Tax Delay by Adam Cohen, CPA

Posted on February 18, 2016 by Adam Cohen

Among the provisions included in the recently passed federal spending bill is a two-year delay in the Affordable Care Act’s 40 percent excise tax imposed on employer’s sponsoring high-cost health insurance plans. With the postponement of the so-called “Cadillac” tax, employers who offer health insurance valued at more than $10,200 for individual plans and $27,500 for family coverage will have more time to rein in costs without watering down employee benefits. Moreover, under the new bill, employers will be able to deduct their payment of the tax, if and when their health plans exceed the thresholds, which will be indexed for inflation.

While the recent delay provides lawmakers with a potential open door to repeal the tax entirely in the future, employers offering workers generous health benefits should continue planning for the 2020 Cadillac Tax. One option to consider is to implement health savings accounts (HSAs) to help workers cover more out-of-pocket medical costs. For 2016, the maximum amount employees may contribute to an HSA is $3,350 for individuals or $6,750 for family coverage. HSA participants who are 55 or older have the option to contribute an additional $1,000 “catch-up” contribution this year.

The advisors and accountants with Berkowitz Pollack Brant’s Tax Services practices work with individuals and businesses of all sizes to understand and comply with the provisions of Affordable Care Act.

About the Author: Adam Cohen, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via e-mail


Businesses will Face New Standards for Presenting Deferred Taxes in the Future by Robert C. Aldir, CPA

Posted on February 16, 2016 by Robert Aldir

The Financial Accounting Standards Board (FASB) has issued new accounting methods intended to reduce the complexity businesses encounter when presenting deferred income tax assets and liabilities on their financial statements.


Under the current U.S. Generally Accepted Accounting Principles (GAAP), a business must expend a significant amount of time, effort and costs to separate deferred income tax assets and liabilities between current and noncurrent amounts in a classified statement of its financial position.  Under the new standard, however, businesses will be required to classify both deferred tax assets and liabilities as noncurrent in their financial statements. As a result of this update, GAAP reporting will better align with the requirements of the International Financial Reporting Standards, which aims to be a universal method for businesses to prepare their financial statements and report their financial positions to stakeholders throughout the world.


The new standards for reporting deferred taxes will apply to public companies beginning after December 15, 2016. For all other entities, including private companies and not-for-profits, the standards will go into effect after December 15, 2017, for those businesses issuing financial statements for annual periods, or after December 18, 2018, for interim period reporting.


Should an entity elect to apply the new standards before the required dates, it must disclose in the first interim and first annual period of change the following information:

  1. The nature of and reason for the change in accounting principle, and
  2. A statement that prior periods were not retrospectively adjusted.

Entities that elect to apply this guidance retrospectively should disclose in the first interim and first annual period of change the following information:

  1. The nature of and reason for the change in accounting principle, and
  2. Quantitative information about the effects of the accounting change on prior periods.


About the Author: Robert C. Aldir, CPA, is an associate director with Berkowitz Pollack Brant’s Audit and Attest Services practice, where he provides accounting, auditing and litigation-support counsel to public and privately help companies located throughout the world.  He can be reached in the CPA firm’s Miami office at (305) 379-7000 or via email at


MLPs do not Play Nicely with IRAs by Jeffrey M. Mutnik, CPA/PFS

Posted on February 15, 2016 by Jeffrey Mutnik

Investing in master limited partnership interests (MLPs) comes with a multitude of traps and foibles, for which investors should keep their eyes wide open. A recent article in The Wall Street Journal describes a common situation that turned into a tax nightmare   because the investors were unaware of the potential for an investment in an IRA to be taxed in the current year.


Consider the following scenario: Jane Investor meets with her financial advisor. Part of her financial assets consist of a Roth IRA worth $500,000.  Through a series of questions and interviews, the advisor determines that Jane’s risk tolerance is low.  The advisor builds a suitably conservative portfolio of stocks and bonds included within the IRA.


Jane’s husband John Investor also has a $500,000 Roth IRA account. However, in deeming John’s risk tolerance to be considerably higher than Jane’s, the advisor builds a more aggressive portfolio for John. Because John knows that income generated within the Roth IRA will avoid taxation today and that any future distributions from the account will not be considered taxable income, he instructs the advisor to use his Roth account for the most aggressive investments within his overall portfolio. He expects that this strategy will yield greater than normal returns tax free.


Jane and John each sign documents allowing the advisor the latitude to build their portfolios. They review their statements with glee, as each portfolio grows through the year.  However, they do not dwell on the details of what the accounts actually own.  Specifically, since the Roth accounts are tax-free (unlike a tax-deferred standard IRA), they pay no attention to the underlying portfolio assets in those accounts.


Does this scenario sound familiar? Do you know what’s next for Jane and John?


Jane sails through the year realizing 6 percent growth of her Roth IRA with no tax issues within the account.


John assumes his investment strategy paid off with his Roth IRA realizing 10 percent growth for the year. However, the wind is soon taken from his sails when he discovers that his account includes various MLPs that made money during the year and are subsequently treated as taxable business income.


MLPs are liquid because they are traded like stocks. However, they do not provide investors with dividend income that is reported on Form 1099-DIV.  Rather, the MLP’s activity flows through to the owner on the Partnership’s K-1.  If an owner is lucky enough to have invested in a partnership that does well, such income is considered business income inside an IRA, which is taxable to the IRA in the year earned.  Thus, the expected tax advantages of an IRA will not materialize.  Worse, the IRA will pay tax using compressed rates, which will increase the investor’s tax liabilities.


Investors must pay attention to the underlying assets and finer details included in all of their investments. For Jane and John, their best option is to divest of all MLP investments in their IRA accounts to avoid potential current taxation and in their taxable accounts to avoid potential state tax implications.  They should also consult with their tax accountant and financial advisor, together, to create a less taxing portfolio that retains appropriate segment exposure to meet their risk tolerance.


About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director with the Taxation and Financial Services practice of Berkowitz Pollack Brant Advisors and Accountants, where he provides tax and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached in the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via email at

Six-Year Deadline for Retirement Plan Sponsors Comes Up in 2016 by Sean Deviney, CFP

Posted on February 11, 2016 by Richard Berkowitz, JD, CPA

Businesses that sponsor pre-approved 401(k), profit-sharing or other defined contribution (DC) retirement plans, must sign and adopt restated plan documents that comply with IRS-approved wording by April 30, 2016. Doing so will ensure the plans continue to qualify for tax benefits.


Sponsors of pre-approved prototype and volume submitter retirement plans typically purchase their plans from financial institutions, third party administrators or similar providers, who are required to update their plans every six years. These providers should have already sent to employers sponsoring pre-approved retirement plans the IRS-approved plan documents that have been updated to comply with changes in the law. Employer who have not yet received pre-approved defined contribution plan restatement should contact their providers immediately.


This mandatory restatement is an ideal time for businesses to evaluate the current provisions in their retirement plans. Provisions put in place years ago may no longer be optimal for a company and its employees today. Items to consider are the plan’s eligibility requirements, entry dates, automatic enrollment, vesting schedule, matching or profit sharing formula and Roth availability.


With the April 30 deadline around the corner, employers should be in the midst of planning to submit their determination letters as soon as possible. The professionals with Provenance Wealth Advisors work with businesses of all sizes, through start-ups, mergers and acquisitions, to design benefits plans and implement best practices to meet regulatory compliance and serve the needs of plan sponsors and participants.


About the Author: Sean Deviney is a CFP®* professional and retirement plan advisor with Provenance Wealth Advisors, an independent financial services firm that often works with Berkowitz Pollack Brant Advisors and Accountants. For more information, call (800) 737-8804 or email

Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.

Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC.

Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. You should discuss any legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.

* Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.



Valuation Dates and Subsequent Events by Sharon F. Foote, ASA, CFE

Posted on February 09, 2016 by Scott Bouchner

One of the key characteristics of a business valuation is that it is the value of a business interest as of a specific point in time. Therefore, establishing the valuation date is of great importance and should be done at the beginning of the information-gathering stage. It is possible that the value of the business could be materially different even a day earlier or a day later.


Valuations for some purposes have dates that are easily established. For example, for estate tax purposes, the valuation date would be the date of death or, if elected by the estate’s personal representative, the alternate valuation date (six months after the date of death). For gift tax valuations, the valuation date should be the date of the gift’s transfer. In divorce situations the date of filing of the case is typically, but not always, the valuation date. Discussions with clients and/or counsel may be necessary in other scenarios, particularly when litigation is involved and a valuation is needed, in order to establish the appropriate valuation date.


If the value of the company changed (either upward or downward) due to an event after the valuation date, what should be done? The general rule is that events subsequent to the valuation date are disregarded unless they were “known or knowable” at the date of valuation.


Subsequent events may materially affect the fair market value of a company, which is the appropriate standard of value for estate or gift tax filing purposes. The definition for fair market value is contained in IRS Revenue Ruling 59-60, as well as Treasury Regulations §20.2031-1(b) and §25.2512-1. The definition states “the price at which property would change hands between a willing buyer and a willing seller…both parties having reasonable knowledge of the relevant facts.” This definition is interpreted to mean what facts were “known” or “knowable” as of the valuation date.


Statement on Standards for Valuation Services (SSVS-1) issued by the American Institute of Certified Public Accountants (AICPA) in June 2007, states: “Generally, the valuation analyst should consider only circumstances existing at the valuation date. An event that could affect the value may occur subsequent to the valuation date; such an occurrence is referred to as a subsequent event. Subsequent events are indicative of conditions that were not known or knowable at the valuation date, including conditions that arose subsequent to the valuation date. The valuation would not be updated to reflect those events or conditions. … In situations in which a valuation is meaningful to the intended user beyond the valuation date, the events may be of such nature and significance as to warrant disclosure (at the option of the valuation analyst) in a separate section of the report in order to keep users informed … Such disclosure should clearly indicate that information regarding the events is provided for informational purposes only and does not affect the determination of value as of the specified valuation date.” (SSVS-1, AICPA, Section 43, pages 20-21.)


It is essential that valuators differentiate between events that could be foreseen at the valuation date and those events that could not. For illustrative purposes, consider whether an agreement executed shortly after the valuation date with a new major customer would likely be known or knowable at the valuation date. It was most likely in the works at the valuation date and, therefore, known or knowable at that point. On the other hand, a major storm that causes major damage to the business and its facilities shortly after the valuation date would not have been known or knowable and, therefore, should not be considered in the valuation. However, the differentiation is not always so obvious and must be thoroughly examined and considered by the valuator in each instance.


The Tax Court (as have other federal courts) historically favored consideration of subsequent events when they are reasonably foreseeable, as of the valuation date, by the hypothetical purchaser or seller. Furthermore, the Court looked favorably upon examinations of subsequent events that demonstrate the reasonability of the expectations of hypothetical purchasers or sellers or substantiate the valuator’s assumptions. Cases such as Estate of Helen Noble v. Commissioner, TC Memo. No. 2005-2, and Estate of John Koons v. Commissioner, T.C. Memo 2013-94, may be helpful to review.


In conclusion, we believe the best approach for valuators is to objectively scrutinize subsequent events together with their clients, to conclude if those events would have had an impact on the business’s value had they been “known or knowable” as of the valuation date and then to thoroughly document such examination and the resulting conclusion.



About the Author: Sharon F. Foote, ASA CFE, is a manager in Berkowitz Pollack Brant’s Forensic and Business Valuation Services practice. For more information, call 305-379-7000 or e-mail


Social Security Changes to Know in 2016 by Jeffrey M. Mutnik, CPA/PFS

Posted on February 04, 2016 by Jeffrey Mutnik


Under the Bipartisan Budget Act of 2015, taxpayers under age 62 will no longer have the ability to take advantage of two popular strategies that once yielded married couples increased Social Security benefits in retirement.


Effective May 2016, married couples will be prohibited from employing the “file-and-suspend” and “restricted application for spousal benefits” strategies, which had previously allowed one spouse to delay receipt of his or her earned Social Security benefits while the other spouse collected income from unearned spousal benefits.  Rather, in the future, these married spouses will be limited to receive only the greater of either his or her own retirement benefits or his or her spousal benefits, not both.


Couples that are currently taking advantage of these strategies will be grandfathered in under the old rules and permitted to continue to do so.  Similarly, taxpayers age 62 to 66 may escape the restrictions in the new law when they take the following steps:


  1. Request a voluntary file and suspension before April 30, 2016, if born before May 2, 1950
  2. Complete a restricted application before April 30, 2016, if born between May 2, 1950, and January 2, 1954.


In light of these changes, current and soon-to-be retirees should meet with their advisors, including accountants and financial estate planners, to consider alternative strategies for maximizing retirement benefits as part of a comprehensive estate plan. While retirees can still begin claiming Social Security benefits when they reach 62, it is most likely advisable to wait as long as possible to maximize monthly benefits.


About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director with the Taxation and Financial Services practice of Berkowitz Pollack Brant Advisors and Accountants, where he provides tax and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms.  He can be reached in the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via email at




A Surprising and Risky Trend in Commercial Real Estate Lending Practices by Shea A. Smith, CPA

Posted on February 03, 2016 by Shea Smith

There was a time when non-recourse financing for commercial real estate projects protected borrowers against personal liability for a loan gone bad. Lenders would look solely to the underlying assets of the project to recover losses when a loan defaulted. However, as times have changed, so too have these protections. An increasing number of non-recourse loan agreements now include carve-out provisions that essentially turn non-recourse debt into a recourse loan, for which the borrower holds personal liability for repayment. Today, these provisions, known as bad-boy guarantees, often cover actions beyond the borrower’s control that may send a loan into default. As a result, borrowers are often surprised to be caught in a lender’s crosshairs and personally liable.



Bad-boy guarantees were once included in non-recourse loans solely to protect lenders from borrowers who knowingly or intentionally committed specific bad acts, such as fraud, misappropriation of funds or breach of an environmental representation. When a borrower performed any of these egregious acts, the lender had a claim against the borrower personally to recoup losses.


Today, however, the pervasiveness of bad-boy guarantees in commercial financing has expanded to cover a wider range of breaches, including single-purpose entity covenant violations, impermissible transfers or bankruptcy.  Moreover, under various state laws, the courts have enforced these provisions without much interpretation, instead basing their rulings on the sophistication of the parties and the specific terms of the agreements.


As a practical example, consider the 2011 case of Wells Fargo Bank, N.A. v. Cherryland Mall, in which the Court of Appeals of Michigan found the borrower liable for a $2.1 million deficiency claim on an $8 million non-recourse loan due to a violation of a standard single-purpose entity (SPE) covenant.  When the real estate market declined in 2009, Cherryland became insolvent. Despite the borrower’s lack of a voluntary or willful “bad-boy” act, the court ruled that the SPE covenant clearly required Cherryland to remain solvent and deemed the borrower personally liable for the debt.


All Bad Boy Guarantees are Not Created Equal

Borrowers must understand that there is a distinction between above the line and below the line acts that will result in significantly different levels of liability. Above the line acts will result in a guarantor being held liable for only the actual losses the lender incurred as a result of a “bad act,” whereas below the line acts will trigger liability for the entire amount of the loan.


Key Takeaways

It behooves borrowers to evaluate personal guarantees as soon as they start negotiating new debt. They must carefully review the term sheet and be sure they understand the language and full scope of a lender’s bad boy guarantees before signing with their agreement. Some items that are in the borrower’s best interest to consider include the following:


  1. Recognize the difference between above the line and below the line acts and negotiate terms so that below the line guarantees are reserved for the most egregious “bad-boy” acts, such as fraud or misrepresentation;
  2. Do not agree to recourse provisions triggered by general single-purpose entity covenants, especially those relating to adequate capitalization and solvency;
  3. Try to exclude from carve-out provisions acts by third parties, such as those caused by environmental issues and tenant lease terminations, which may be outside the borrower’s control;
  4. Seek to limit non-recourse carve out provisions to traditional “bad boy acts” that require bad intent or self-dealing by the borrower.  It is vital that real estate professionals engage both an accountant and real estate attorney early in the debt negotiation process to avoid an unpleasant surprise if something goes wrong with the deal in the future.

About the author: Shea A. Smith, CPA, is a director with Berkowitz Pollack Brant’s Audit and Attest Services practice, where he provides accounting, audit and consulting services for privately held businesses in the real estate, construction, manufacturing and retail industries. He can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at

Employer’s Duty to Support Retirement Plan Loans and Hardship Distributions by Lisa N. Interian, CPA

Posted on February 01, 2016 by Lisa Interian

There are times when an employee may request a loan or hardship distribution from his or her employer-sponsored retirement account in order to meet an “immediate and heavy” financial need. While these withdrawals are often permissible under the terms of a plan, the IRS and Department of Labor have expressed concern that improper authorization and lack of documentation supporting such financial need may be contributing to a growing problem of retirement plan “leakage,” which results when withdrawals that are not repaid.

As a result, the IRS, in May 2015, reminded employers that it is their duty to maintain accurate records when sponsoring retirement plans, even when they use the services of trustees and third-party administrators (TPAs) to manage participants’ transactions. The IRS alert to plan sponsors made it clear that the burden of responsibility rests on them, and that it is not sufficient for plan participants to maintain their own records or to rely on TPAs.

Often, plan trustees and TPAs will fail to maintain all of the required documentation to support a plan participant’s loan or hardship distribution; it is up to the plan sponsor organization to gather the supporting records. Furthermore, according to the IRS, an electronic hardship withdrawal application process in which the employee “self-certifies” that he or she has an immediate and heavy financial need without providing back-up documentation will not serve as sufficient proof of a proper hardship withdrawal in the event of a plan audit.

Among their responsibilities to administer plans and meet proper recordkeeping requirements, plan sponsors must retrain the following documents when granting a loan to a plan participant:

  1. Evidence of the participant’s loan application and the sponsor’s process of review and approval,
  2. An executed plan loan note,
  3. If applicable, verification from a lender or other third-party that the loan proceeds were used by the participant to purchase or construct a primary residence,
  4. Evidence of loan repayment, and
  5. Evidence of collection activities associated with loans in default and related Form 1099-R, when applicable

When granting hardship distributions to plan participants, employers must retain the following records:

  1. Documentation of the hardship request and the sponsor’s review and approval
  2. Financial documentation that substantiates the employee’s “immediate and heavy” financial need
  3. Documentation to support that the hardship distribution was made in accordance with the IRS and under the provisions of the plan
  4. Proof of the distribution made and related Form 1099-R

Berkowitz Pollack Brant and its affiliate Provenance Wealth Advisors (PWA) have an experienced and qualified employee benefit plan service team that works with businesses of all sizes and across all industries to meet the rigorous compliance issues associated with establishing, maintaining and auditing employee benefit plans.

About the Author: Lisa N. Interian, CPA, is an associate director of Audit and Attest Services with Berkowitz Pollack Brant, where she performs retirement plan audits and works with privately held companies in a range of industries to meet their reporting and compliance needs. She can be reached in the CPA firm’s Miami office at (305) 379-7000 or via email at


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