Heads up: The feds are cracking down on 401(k) hardship withdrawals

Here’s another reason why employers should limit (or even eliminate altogether) workers’ opportunities for 401(k) hardship withdrawals.  

Both the DOL and the IRS appear to be ramping up their enforcement of noncompliant hardship withdrawals.

That’s because the feds are worried about leakage in retirement plans – i.e., withdrawals made before retirement that permanently depletes savings. Hardship withdrawals are a big part of the leakage problem.

Because of their concern, the feds’ are checking to make sure that employers are following the very specific criteria for these withdrawals.

Surviving the scrutiny

To avoid getting caught in the feds’ crosshairs, there are a number of steps employers can take.
First, ensure your processes for 401(k) hardship withdrawals gibe with the feds’ guidelines. The Service’s FAQ should be used to check against your own policies. Here’s a breakdown of some key points in that FAQ:

• Plan documents must spell out the specific criteria you use to make hardship determinations.
• A process must be in place to verify the hardship withdrawal meets the IRS’ “immediate and heavy financial need” requirement.
• Documentation must be created to prove the worker has exhausted any available loans and resources (insurance, bank accounts, etc.).
• The withdrawal shouldn’t exceed the amount necessary to satisfy the immediate need.
• Elective deferrals should generally be suspended before the withdrawal is taken.
• Employers aren’t required to offer 401(k) hardship withdrawals.

If increased federal enforcement and compliance burdens aren’t worth the hassle, firms should consider eliminating the hardship withdrawal option altogether.

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Source: News from HR Morning