Q: An employee has requested a hardship withdrawal from the 401(k) plan. We are relying on his statements to the plan administrator that he is in true financial need, but another person in the office says he actually does have money in the bank. Do we take the word of the person requesting the withdrawal, or demand documentation?
A: The pertinent point is whether or not the Plan Administrator has “actual knowledge” of the participant’s financial status. In the Final Regulations covering hardship withdrawals, released on September 19, 2019, the Internal Revenue Service (IRS) addresses that point. One requirement for the granting of a hardship withdrawal is that the money is necessary for an immediate and heavy financial need. The employee must provide a representation that he or she has insufficient cash or other liquid assets available to satisfy the financial need, and the distribution may not be made if the administrator has actual knowledge to the contrary. In the final regulations, the IRS states, “The requirement does not impose upon plan administrators an obligation to inquire into the financial condition of employees who seek hardship distributions.” Because administering hardship withdrawals is a fiduciary responsibility, we urge you to consult legal counsel before making a decision. Read the final hardship regulations in the September 23, 2019, Federal Register. For more information, click here.