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