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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
Before a 401(k) plan permits its participants to receive hardship distributions in order to pay medical, educational, housing or other specified expenses, the plan may require the participant to specify the reason for the distribution request and document that he has exhausted all alternative sources of financing, such as insurance proceeds, commercial loans and the liquidation of other assets. In its Retirement News for Employers, the IRS addressed how the plan sponsor should verify that the required conditions for the hardship distribution have been met, and what plan sponsors should do when it is discovered that such a distribution has been made without the conditions having been met.
In order to find such a mistake, the IRS recommends that plan sponsors review: (a) the plan document to determine when distributions may occur; (b) each plan distribution and its related documentation showing the reason for the distribution; and (c) whether distributions designated as hardship distributions were made in accordance with the terms of the plan.
The company should take reasonable steps to ensure that a participant who receives a hardship distribution without meeting the plan’s conditions for such a distribution returns the erroneously distributed amounts to the plan. The participant should also be advised that to the extent any amounts are not returned, they are not eligible for tax-favored treatment, such as rollovers to IRAs or other retirement plans.
The IRS recommends that a formal approval process should be installed to ensure that hardship distributions comply with the terms of the plan, including documenting the reason for the hardship and certification of the unavailability of other sources of money. Company officials with the authority to authorize distributions should be made aware of the formal process, and the dangers of approving distributions based upon verbal or informal requests.
The IRS recommends the use of the correction programs described in Rev. Proc. 2006-27 (CCH Pension Plan Guide ¶17,299R-86 ). If the plan is not the subject of an IRS examination, then the plan will generally be able to correct the mistake using either the Self-Correction Program (SCP) or the Voluntary Correction Program (VCP), according to the IRS. If the plan is under IRS examination, then mistakes are generally corrected pursuant to a closing agreement under the Audit Closing Agreement Program (Audit CAP). However, if the mistake is an isolated instance, the mistake may still be eligible for correction under SCP. More details on the IRS correction programs are available at www.irs.gov/ep under “Correcting Plan Errors.” The IRS also recommends referring to its online “401(k) Fix-It Guide.”
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