Compliance

What the IRS Will Look for When Reviewing Hardship Distributions

IRS examiners will determine if appropriate source documents were obtained to substantiate that hardships were made due to an immediate and heavy financial need.

By Rebecca Moore editors@plansponsor.com | February 27, 2017
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A memorandum issued to Internal Revenue Service (IRS) Employee Plans (EP) Examinations employees sets forth standards for examining whether a section 401(k) plan hardship distribution is “deemed to be on account of an immediate and heavy financial need” under safe-harbor standards set out in the Income Tax Regulations.

The memorandum notes that, “A distribution is deemed to be on account of an immediate and heavy financial need” under § 1.401(k)-1(d)(3)(iii)(B) of the Income Tax Regulations if it is for one or more of the following:

  • Expenses for medical care deductible under section 213(d) for the employee or the employee’s spouse, children or dependents (as defined in section 152) or primary beneficiary under the plan;
  • Costs directly related to the purchase of a principal residence;
  • Payment of tuition, related educational fees, room and board expenses for up to the next 12 months of post-secondary education for the employee or the employee’s spouse, children or dependents (as defined in section 152) or primary beneficiary under the plan;
  • Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure of the mortgage on that residence;
  • Payments for burial or funeral expenses for the employee’s deceased parents, spouse, children or dependents (as defined in section 152) or primary beneficiary under the plan; or
  • Expenses for the repair of damages to the employee’s principal residence that would qualify for the casualty deduction under section 165.

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