Does your retirement plan use a third party administrator or recordkeeper for handling plan loans, hardships or rollovers? Even if a third party manages these transactions, you, as a plan sponsor, are ultimately responsible for ensuring that participant transactions are valid and properly documented.
In its April newsletter, the IRS made it clear that documentation is the plan sponsor’s responsibility. It is not sufficient to rely on participants to keep their own records. Likewise, electronic self-certification by participants, often used by recordkeepers as a method for documenting eligibility for plan loans or hardships, is also unacceptable.
Although the regulations permit self-certification to show that a distribution is the only way to alleviate a hardship, plan sponsors must request and retain records demonstrating the nature and amount of a hardship or the purpose of a loan. For example, if a participant requests a loan to purchase a primary residence, the plan sponsor must obtain and review documentation of the home purchase before the loan is approved. Records must also be kept as proof of distribution and loan repayments, along with other documents supporting the hardship or loan. Documentation may be kept in paper or electronic format.
Keeping accurate records on rollovers accepted into a plan is also critical. When terminating a plan, plan sponsors must now submit proof that any rollover contributions received during the year and the five prior plan years were from qualified sources. See our prior e Bulletin on the process for determining the validity of rollovers. Administrators should ensure that their plans have strong procedures – not just for accepting rollovers, but also for retaining proper records.
This is a good time to do some spring cleaning on your retirement plan’s procedures for accepting and documenting loans, hardships and rollovers. If you have questions about how to properly handle and document participant transactions for your plan, contact any member of Warner’s Employee Benefits/Executive Compensation Practice Group.