Hardship Self-Certification: Document, Document, Document!

For plan sponsors, the change is a welcome relief. Some, however, have mistakenly interpreted self-certification to mean no documentation is needed at all.

That assumption can create risk.

As the IRS begins examining hardship distributions processed under the new rules, an important message is emerging: although the process has been streamlined, plan sponsors must still maintain appropriate documentation and records. Put simply,  the need for prudent recordkeeping has not been eliminated.

What Actually Changed?

Before SECURE 2.0, participants typically had to provide documentation, such as invoices, bills, or contracts to support a hardship withdrawal request and substantiate the amount needed.

Today, plan administrators may generally rely on a participant’s self-certification that they have an immediate and heavy financial need and that the requested distribution is necessary to satisfy . That change reduces administrative burden and can speed up processing.

What has not changed is the plan sponsor’s responsibility to administer hardship distributions in accordance with the plan document and applicable IRS rules.

The Sponsor Still Owns the Compliance Risk

Many hardship withdrawals are processed by a recordkeeper or third-party administrator (TPA). While these service providers may administer the process, they generally do not assume fiduciary responsibility for compliance unless specifically agreed to under their service arrangement.

As a result, plan sponsors remain responsible for demonstrating that hardship distributions were in accordance with the plan document and applicable IRS requirements. If an IRS auditor requests documentation, the sponsor ultimately bears that responsibility.

Outsourcing administration does not outsource accountability. Plan fiduciaries should periodically confirm thar their recordkeeper or TPA is administering hardship distributions properly by documenting that they are following IRS procedures.

That distinction often becomes apparent during an audit, when a sponsor assumes the service provider has retained the necessary documentation only to discover that key records are incomplete, unavailable, or difficult to retrieve.

What Documentation Should Sponsors Retain?

Plan sponsors should work with their recordkeeper or TPA to confirm that hardship certifications are maintained in written or electronic form and can be readily produced if requested. Sponsors should also verify that they have access to documentation related to the transaction, including:

• The participant’s hardship certification
• Distribution request information
• Approval records
• Distribution records
• Any related communications supporting the transaction

The objective is straightforward: if an auditor asks questions years later, the sponsor should be able to clearly demonstrate what occurred and why the distribution was approved.

A Word of Caution About Telephone Transactions

Plan sponsors should pay particular attention to hardship withdrawals initiated by telephone.

Many recordkeepers allow participants to complete hardship requests through a call center rather than a paper or online form. Although this approach can improve efficiency, sponsors should confirm that the recordkeeper is capturing and retaining the participant’s certification in a form that can be produced if requested.

A phone call alone is not sufficient documentation. The key question is whether there is a written or electronic record of the participant’s certification and the resulting distribution.

Now Is a Good Time for a Process Review

Sponsors that rely on hardship self-certification should take the opportunity to review their procedures and confirm that appropriate records are being maintained. Key questions to consider include:

• How is the participant’s certification captured?
• Where is the certification stored?
• How long is it retained?
• Can it be readily produced during an audit?
• Are all hardship-related records maintained in a centralized location?
• Does the recordkeeper provide documentation supporting telephone-based transactions?

These are relatively simple questions, but they may help uncover gaps before an auditor does.

The Bottom Line

Hardship self-certification is one of SECURE 2.0’s most significant administrative simplifications. It reduces paperwork, streamlines processing, and makes hardship withdrawals easier for both participants and plan sponsors. But self-certification is not a documentation-free process.

Although plan sponsors generally no longer need to collect supporting documents from participants, they must still be able to demonstrate that hardship distributions were properly administered and that participant certifications were obtained and retained.

The lesson is simple: document, document, document!

A brief review of your hardship withdrawal procedures today can help identify gaps in documentation and recordkeeping before they become issues during an IRS audit.