Maintaining Adequate Plan Documentation

A retirement savings plan must maintain adequate documentation to support plan transactions.  If a 401(k) allows for hardship withdrawals or a distribution from a 401(k) plan “made on account of an immediate and heavy financial need of the employee, and the amount must be necessary to satisfy the financial need,” the employee requesting the distribution should provide paperwork proving the amount of the hardship.  The plan document will specify if hardship withdrawals are available and under what specific circumstances.   For example, if the plan allows for participant loans under the plan this option must be utilized before a hardship withdrawal.  Below are the expenses that the Internal Revenue Service stipulates fall under the hardship withdrawal designation and the documentation that should be maintained:

  1. Prevent eviction or foreclosure of primary residence:
    1. Required Documentation: An eviction notice, notice of foreclosure, notice to vacate the premise or a signed letter from the landlord. The statement must be dated within the last 60 days, and it must be clear that eviction or foreclosure will result without payment.
  2. Purchase of primary residence:
    1. Required Documentation: A copy of estimated settlement costs, a good faith estimate or sales contract.
  3. Post-secondary education expense for the next 12 months for you, your spouse, dependents or your children:
    1. Required Documentation: A copy of applicable bill
  4. Funeral expense:
    1. Required Documentation: Invoices from funeral home, cemetery and/or religious institution.
  5. Medical expenses not covered by insurance for you, your spouse or dependents:
    1. Required Documentation: Medical bills for expenses not covered by insurance, insurance statement indicating the expenses not covered.