Fidelity Investments told retirement plan sponsors and investment professionals in a late April notice that it had asked IRS to change or withdraw recently updated guidance on maintaining documentation for participant hardship withdrawal and plan loan requests.
In a message on its website, Fidelity, one of the largest U.S. private-sector retirement plan recordkeepers and investment managers, said the April 1 update in IRS’ Employee Plans News newsletter and on the agency’s website indicated that 401(k) hardship withdrawal documentation must be received and maintained by plans was “contrary to recent indications from IRS representatives.” The investment management firm said the article “does not have the effect of regulation,” and that Fidelity is “working with industry and sponsor groups to get the IRS to modify or withdraw” it.
Fidelity said in the notice posted on the “Fidelity Forum” section of its corporate website that the April 1 IRS article took a similar position on self-documentation of participant requests for plan loans. It said the article “purports to establish a new after-the-fact requirement” that the plan sponsor have documentation verifying that the loan proceeds were used to purchase or construct a primary residence.
A requirement that a plan sponsor or its recordkeeper maintain documentation of hardship withdrawal and plan loan certifications now being made electronically by participants could lead to increased paperwork and use of staff time for Fidelity and its client plan sponsors.
Fidelity said in a memo accompanying its web posting questioning the IRS update that handling employee substantiation paperwork that may be incomplete or erroneous “delays processing the withdrawal which often exacerbates the participant’s financial hardship.”
A reminder posted in 2013 but no longer available on the IRS website from now-retired Director of Employee Plans Examinations Monika Templeman asked plan sponsors to verify and document that hardship distributions comply with their plan document and the law. In some cases, allowing participants to apply for loans or hardship withdrawals online may not give the plan sponsor adequate chance to verify the reason the participant is seeking this emergency funding, that posting said.
Memo About Fidelity’s Online Certification
Fidelity in its recent online communication to plan sponsors included a link to a seven-page memo reviewing “the legal framework that supports” its e-Certified Hardship Withdrawal Process. The process allows participants to certify solely online both their purpose for applying for the hardship withdrawal and that other sources of financing are not available to cover the emergency need, as required by law. Fidelity’s procedure does ask employees to retain documentation of the facts and circumstances surrounding the situation, and says the plan administrator reserves the right to request copies of that documentation, the memo said.
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