Hardship Distributions

An individual's consequences for making a false hardship withdrawal can range from fines and penalties (at least 10%) to tax implications or even jail time. 

A Plan Sponsor's consequences for allowing a non-qualifying & not repaid self-certified hardship withdrawal is likely to be potential IRS sanctions for failing to properly administer the retirement plan; this could include substantial DOL fines and potential legal repercussions.

While self-certification lessens the Plan Sponsor's involvement at the time of the distribution, the DOL will require that the Plan Sponsor properly monitor the distributions.  The Plan Sponsor will need to look for potential errors & fix any errors found by inspecting the paperwork for at least a sample of the distributions each year.  Since the DOL loves to look at auditor's workpapers, this inspection will also need to be a part of the audit process.  If the financial need paperwork can't be found, the distribution will need to be "fixed" (i.e. reported as an early withdrawal or repaid to the Plan).  Also, the Plan Sponsor will need to report a prohibited transaction to the DOL and file all the necessary forms.

Since it may be difficult for an employee to find their financial need paperwork at the time of the audit, the Plan Sponsor may want to obtain this paperwork at the time of the distribution and keep it with the employee's records.  Even though the Plan Sponsor is not "approving" the distribution, the Plan Sponsor will need to "fix" any erroneous distributions (or basically not allow them).

In Summary, we think the risk of high DOL penalties for undocumented distributions far outweighs the costs to collect all the proper paperwork at the time of the distribution.  This paperwork can be collected and retained by the Plan Sponsor, the custodian, or the TPA.