Retirement Solutions Now Header

SponsorNews - December 2016

Records to Keep for Loans and Hardship Withdrawals

By Rebecca Moore This email address is being protected from spambots. You need JavaScript enabled to view it. | April 02, 2015

The IRS reminds retirement plan sponsors it is up to them to track loans and hardship withdrawals.

“Even if you use a third-party administrator (TPA) to handle participant transactions, you’re still ultimately responsible for the proper administration of your retirement plan. Make sure you’re keeping up with the recordkeeping requirements,” the Internal Revenue Service (IRS) tells plan sponsors on its website.

Failure to have these records available for examination is a qualification failure that should be corrected using the Employee Plans Compliance Resolution System (EPCRS).

For hardship withdrawals, the plan sponsor should retain the following records in paper or electronic format:

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

The agency says it is not sufficient for plan participants to keep their own records of hardship distributions, and electronic self-certification is not sufficient documentation of the nature of a participant’s hardship. IRS audits show that some TPAs allow participants to electronically self-certify that they satisfy the criteria to receive a hardship distribution. While self-certification is permitted to show that a distribution was the sole way to alleviate a hardship, self-certification is not allowed to show the nature of a hardship.

A plan sponsor should retain the following records, in paper or electronic format, for each plan loan granted to a participant:

  • Evidence of the loan application, review and approval process;
  • An executed plan loan note;
  • If applicable, documentation verifying that the loan proceeds were used to purchase or construct a primary residence;
  • Evidence of loan repayments; and
  • Evidence of collection activities associated with loans in default and the related Forms 1099-R, if applicable.

If a participant requests a loan with a repayment period in excess of five years for the purpose of purchasing or constructing a primary residence, the plan sponsor must obtain documentation of the home purchase before the loan is approved. Again, the agency says participant self-certification of loan eligibility is not sufficient.


IRS make 401(k) auto enrollment easier

Apr 03, 2015 | By Nick Thornton

The Treasury Department and the IRS have issued new guidance making it easier for employers to correct unintended contribution errors in retirement plans featuring automatic enrollment and automatic escalation. 

It is the latest move by regulators aimed at encouraging sponsors to implement the savings features in retirement plans. 

“Treasury and IRS are taking another step to promote broader participation in 401(k) and similar plans by facilitating automatic enrollment and automatic contribution increases,” J. Mark Iwry, senior advisor to the Secretary and Deputy Assistant Secretary for Retirement and Health Policy, said in a press release. 

“These simplified, safe harbor correction methods build on previous steps to encourage plan sponsors to adopt ‘next generation’ features and practices that help employees save for retirement,” he added. 

The new guidance simplifies and reduces sponsors’ costs when they fail to contribute the correct amount of deferrals through the features, according to the release. 

The action was in response to comments from sponsors, their advocates and recordkeepers suggesting the cost of correcting the errors – and the threat of losing tax-preferred status because of infractions – were deterring wider adoption of the features. 

New safe harbor procedures allow sponsors to correct missed deferrals without having to notify the IRS, so long as the correction to the participant’s account is made within 9 ½ months from the end of the plan year the error occurred in. 

In the new guidance, Treasury also issued new safe harbors for how sponsors calculate the amount of corrective contributions to make, including calculations for the amount of employer match that may have been missed. 

There has been growing support over the past few years for auto enrollment and escalation features as primary tools in addressing retirement savings shortfalls. 

Yet adoption has not been universal, and by some measures, may even be stalled. 

A recent Callan Investment Institute study of large and “mega” sized 401(k) plans found 61.7 percent now offer automatic enrollment, primarily to new hires. But only a third of plans offer both automatic enrollment and automatic escalation features. 

A Vanguard study of plans the fund company works with showed participation rates at 91 percent when auto enrollment is utilized, compared to a participation rate of 42 percent in plans without the feature. 

The new safe harbor changes are effective immediately, though they will “sunset” at the end of 2020.



 IRS Updates EPCRS; Reduces Cost of Correcting Deferral Mistakes


The IRS has published Rev. Proc. 2015-28, which makes an important and welcome change to the Employee Plans Compliance Resolution System (EPCRS), the detailed IRS procedure to “fix” retirement plan mistakes. 


Some 401(k) and 403(b) plans have features where participants are automatically enrolled in the plan with a set level of salary deferrals unless they elect otherwise (“automatic enrollment”).  Other plans provide that the rate of deferral increases automatically each year, so that participants will defer greater amounts each year (“automatic escalation”).  These features work wonderfully to help participants save for retirement, but they can also wreak some level of havoc when the automatic changes do not happen when they are supposed to.


Prior to the EPCRS update, the IRS required that the plan sponsor contribute an amount equal to 50% of what the employee would have deferred had the automatic enrollment or automatic escalation feature worked as intended.  (This correction actually applied anytime there was a missed deferral, even if automatic enrollment or escalation did not apply.)  The plan sponsor also had to contribute an amount equal to the total matching contribution that would have been made had the full amount of intended deferrals been contributed, plus an amount equal to the lost earnings on both the deferrals and the matching contribution.  This produced a significant windfall for the affected participants and has discouraged some employers from having these features in their plans.


The IRS has made the correction less burdensome for these errors if they are discovered reasonably quickly.  Under the new rules:


  1. No employer contribution for missed deferrals (called a “qualified nonelective contribution” or “QNEC”) is needed if the failure to automatically enroll the participant or automatically increase the participant’s deferrals is found and corrected by the first payroll after the earlier of (i) 9½ months after when the automatic contribution should have happened; or (ii) last day of the month following the month in which the participant advises the sponsor of the problem.
  2. No QNEC is required for any missed deferral (whether related to automatic enrollment or escalation or not) that happened within the prior 3 months (this is a “rolling” 3-month period) if deferrals are restarted by the first payroll after the earlier of (i) 3 months after the missed deferrals occurred; or (ii) the last day of the month following the month in which the participant advises the sponsor of the problem.
  3. The QNEC is reduced from the old 50% level down to 25% for missed deferral amounts that are over 3 months old but are fixed by the last day of the 2nd plan year following the plan year in which the error occurred (i.e., the normal 2-year correction period for significant errors).


Under all these revised corrections, the plan sponsor must also do the following:


  • Give a notice to the affected participants within 45 days of the date on which the proper deferrals are occurring;
  • Make the matching contribution that the participant would have received had their deferrals been handled as intended; and
  • Contribute an amount equal to the lost earnings on the contributions.  This is based on the earnings that would have been credited to the participant’s account from the participant’s elected investment or, if the participant made no such election, the plan’s default investment.  If the investment suffered a net loss, no earnings need to be credited, but the loss may not reduce the required contribution amounts discussed above.


Where does a plan sponsor’s responsibility end?

by Lawrence Jenab

APR 9, 2015
2:08pm ET

Most sponsors of defined contribution plans rely on a third-party administrator to handle participant loans and hardship withdrawals — typically through the TPA’s website. However, in guidance issued last week, the IRS cautions that the sponsor — not the TPA or the participant — is responsible for maintaining documents proving that those transactions comply with the law.

Plan loans

According to the IRS, the plan sponsor’s files should include all of the following documents, in paper or electronic format, for each plan loan:

  • The participant’s loan application, along with records of its review and approval;
  • An executed promissory note;
  • For home loans, proof that the loan proceeds were used to purchase or construct a primary residence;
  • Proof of all loan repayments;
  • In the event of a default, proof of collection activities; and
  • In the event of a deemed distribution of loan proceeds, the related Form 1099-R.

A repayment period of more than five years is permissible only if the purpose the plan loan is to purchase or construct a primary residence. The guidance stresses that self-certification of this requirement is not permitted. In fact, if a participant requests a repayment period of more than five years, the plan sponsor’s file must include documentation of the home purchase before the loan is approved.

Hardship withdrawals

The guidance also reminds plan sponsors that they must keep records of all hardship withdrawals. In fact, the IRS pointedly notes that failure to have these records for prior hardship withdrawals on file for examination is itself a qualification failure that should be corrected using the Service’s Employee Plans Compliance Resolution System (EPCRS).

The sponsor’s files should contain the following documents for each hardship withdrawal, in paper or electronic format:

  • The participant’s application for a hardship withdrawal, and records demonstrating its proper review and approval;
  • Financial information and documentation that substantiates the participant’s “immediate and heavy financial need” (as that phrase is defined in the Treasury Regulations);
  • Proof that the hardship withdrawal was made in accordance with the applicable plan provisions and the Tax Code; and
  • Records of the actual distribution and the related Form 1099-R reporting it to the IRS.

Some TPAs and sponsors allow participants to electronically self-certify that they qualify for a hardship distribution. But as the guidance stresses, self-certification is never sufficient to demonstrate the nature of the participant’s hardship.

To qualify for a hardship withdrawal, a participant must prove two things: that the withdrawal is “necessary” to meet an “immediate and heavy” financial need. While self-certification is permitted to show that a distribution was necessary, it is not permitted to show that the need is immediate and heavy. Thus, the guidance reminds sponsors that they must obtain documentation showing the nature of the hardship.

What does this mean for plan sponsors?

There is nothing new in the substance of this guidance; i.e., none of the rules have changed. Two things about the guidance are notable, however. The first is the IRS’s emphasis on impermissible self-certification (for both loans and hardship withdrawals). Taken together with the guidance’s pointed reference to audits, the clear message is that the IRS is on the lookout for precisely this issue as it expands its audit program.

The second notable point is the IRS’s statement that each loan or hardship withdrawal for which a plan sponsor does not have the documents listed above in its files constitutes a qualification failure that should be corrected under EPCRS. Plan sponsors should therefore review their loan and hardship files against these lists to ensure that the documents they contain satisfy the applicable regulations. Any sponsor choosing to rely on a TPA to retain these documents will want to make sure that the Services Agreement with the TPA clearly imposes that obligation on the TPA, with meaningful remedies for any breach.

Where loans or hardship distributions were made properly, but the files are incomplete, sponsors should simply obtain the necessary documents. Where loans or hardship withdrawals have been made improperly, sponsors should consider correcting the resulting qualification failures under EPCRS.






Who Is the Plan Administrator?

By PS | April 14, 2015

“The 5500 requests a signature of the Plan Administrator, but otherwise I do not see a reference to this term anywhere. Is it a plan fiduciary? Some other person or entity?  Can it be a third party?” 

David Levine, Groom Law Group, answers:

Another excellent question. The term "Plan Administrator" is used in many ways in the land of retirement plans, so the Experts want to provide a bit of background.  Section 3(16) of the Employee Retirement Income Security Act (ERISA) defines the term "Administrator" to mean:

(i) the person specifically so designated by the terms of the instrument under which the plan is operated;

(ii) if an administrator is not so designated, the plan sponsor; or

(iii) in the case of a plan for which an administrator is not designated and a plan sponsor cannot be identified, such other person as the Secretary [of Labor] may by regulation prescribe.


The duties of an ERISA section 3(16) administrator as specified in ERISA itself relate mainly to reporting and withholding, notice and limited compliance activities. However, there are other parts of ERISA (and related guidance from the Department of Labor) that refer to "Plan Administrator."  Sometimes, third-party recordkeepers are referred to as the plan administrator, whether or not they actually are the plan administrator for ERISA purposes. 

This combination of terms and usage can lead to confusion.  Further, in the retirement industry, a number of services are labeled "3(16) services" but may move beyond the scope of ERISA section 3(16) and actually are actions of an ERISA fiduciary under ERISA section 3(21) that don't fall within the definition of ERISA 3(16). Confusing isn't it? Put simply, the key is to know who is the Plan Administrator.

Getting back to your question, for Form 5500 purposes, the ERISA section 3(16) definition controls. And the best place to look for who is the plan administrator for ERISA purposes, at least at first, is the plan document, which should name one. Some people erroneously believe that the plan administrator MUST be the employer, and, though it often is by designation in the plan document or by default, clearly ERISA allows for designations other than the employer. Other people believe that the plan administrator MUST be a third party, but again there is no basis for this assertion in ERISA (or the Code). The plan administrator may be a third party, but may also be the employer or an internal party.  

You may need to look for designations or delegation of plan administrator status in documents outside the plan. For example, the plan may provide that the employer is the plan administrator unless it appoints another one such as a committee (a not uncommon provision), so you may need to find out if it has done so. As for whether a plan administrator is a fiduciary, if the plan administrator utilizes discretion in the administration of the plan,  the administrator is a plan fiduciary as well.

One thing is certain, you should make sure whomever signs the 5500 as plan administrator is indeed the plan administrator! If the plan administrator is the employer, an authorized representative of the employer must sign the 5500.