Fidelity Wants Clarification About Loan and Hardship Records

Fidelity is taking issue with a recent Internal Revenue Service (IRS) reminder to retirement plan sponsors about their duties to track participant loans and hardship withdrawals.

The IRS recently published a newsletter article indicating that documentation must be created and maintained by plan sponsors related to hardship distributions and loans—and that electronic self-certification is not sufficient to substantiate a participant’s hardship.

According to Fidelity, this article, appearing in the Employee Plans News publication, “does not have the effect of a regulation.” That’s a good thing, the firm says, because it feels some information contained in the article is “contrary to recent indications from IRS representatives.” Because of this, Fidelity is asking the IRS to modify or remove the article entirely from its website and publication archives.

The text of the article was published online on April 1, indicating that a plan sponsor must receive and retain documentation from participants supporting the reason for a hardship distribution from a 401(k) plan. In addition, the IRS stated that directly that “electronic self-certification is not sufficient documentation of the nature of a participant’s hardship.”

Fidelity explains the article took a similar position regarding documentation of participant loans. It also “purports to establish a new after-the-fact requirement,” Fidelity says, which, if applicable, would require plan sponsors to generate and maintain “documentation verifying that the loan proceeds were used to purchase or construct a primary residence.”

As noted by Fidelity compliance staff, the Employee Plans News publication is a periodic IRS newsletter with retirement plan information for retirement plan practitioners. “While it does not have the effect of a regulation or formal interpretation, it may be indicative of the position the IRS is likely to take when reviewing plan procedures,” Fidelity explains.

The firm feels the position of the article on loans and hardship circumstances “does not appear to be supported by IRS regulations and is contrary to recent indications from IRS representatives suggesting that such documentation is not required.”

“The Employee Plans News article has taken many practitioners by surprise because the IRS has had on its business plan an item to provide formal guidance on hardship substantiation,” Fidelity adds. “We are working with industry and plan sponsor groups to get the IRS to modify or withdraw the article until formal guidance is issued.”