Expertise Beyond the Numbers

IRS: Employee Benefit Plan Sponsors Responsible for Tracking Loans, Hardship Distributions

The following blog post from the SC&H Group Employee Benefit Audit practice highlights how the IRS is urging Employee Benefit Plan sponsors to keep up with critical recordkeeping requirements – especially when it comes to hardship distributions and plan loans.

In a recent Employee Plan News article, the IRS provided additional clarity around plan administrators needing to be fully responsible for the proper administration of their retirement plans.

Even if they are using a third party administrator (TPA) to handle participant transactions, plan sponsors need to keep proper documentation on both hardship distributions and plan loans.

According to the IRS, plan sponsors should retain hardship distribution records in paper or electronic format, including:

  1. Documentation of the hardship request, review and approval
  2. Financial information and documentation that substantiates the employee’s immediate and heavy financial need
  3. Documentation to support that the hardship distribution was properly made in accordance with the applicable plan provisions and the Internal Revenue Code
  4. Proof of the actual distribution made and related Forms 1099-R

With regards to plan loans, sponsors should retain these records, in paper or electronic format, for the following reasons:

  1. Evidence of the loan application, review and approval process
  2. Verification of an executed plan loan note
  3. Documentation verifying that the loan proceeds were used to purchase or construct a primary residence, if applicable
  4. Evidence of loan repayments
  5. Evidence of collection activities associated with loans in default and the related Forms 1099-R, if applicable

“In order to ensure that plan sponsors are fulfilling their fiduciary responsibilities to a plan and its participants, plan sponsors should actively monitor the vendors/specialists they employ to help manage the operations of a plan,” said Jennifer Amato, a Director at SC&H Group. Often times, plan sponsors believe their vendors are taking responsibility for functions/activities they actually aren’t, such as obtaining and maintaining documentation surrounding loans and hardships.  Since ultimately, the plan sponsor is responsible for ensuring such transactions handled properly, we recommend that plan sponsors review the processes being performed by their vendors and consider maintaining copies of higher risk transactions internally, such as hardships and loans for a primary residence.”

As highlighted in a recent “Expertise Beyond the Numbers” blog post, the IRS and the Department of Labor are actively monitoring Employee Benefit Plans, which reinforces the need for the right internal controls and recordkeeping processes.

Employee Benefit Plan audits can actually help mitigate potential operational failures, and decrease the likelihood that regulators will scrutinize plan sponsors. These annual compliance reviews – performed independently from the IRS and the Department of Labor – help ensure that sponsors are managing their plans properly.

SC&H Group has a robust Employee Benefit Audit practice that audits over a hundred plans annually ranging in size from 100 to over 200,000 participants. The practice provides plan sponsors with expert EBP audit, audit coordination, and filing services for full compliance and assurance.  Our professionals have both EBP auditing and third-party administration experience — bringing a depth and breadth of knowledge to their engagements — as well as dedication to client service that is unparalleled in the industry.

Also, be sure to download our “Top 10 Issues Affecting Employee Benefit Plans” white paper here.

If you have any questions about this content, or are interested in learning more about SC&H Group’s Employee Benefit Audit practice, we welcome you to contact Jen here.