A recent post in the IRS’s Employee Plans News has two important tips for employers who sponsor 401(k) and similar plans:

1. The plan sponsor is ultimately responsible for maintaining records that document compliance with tax-qualification requirements. Many employers rely on third-party administrators to maintain records of day-to-day transactions, such as loans, hardship withdrawals and distributions. It is important to confirm with the third-party administrators that the records are being kept and that the sponsor will have access to the records–in a usable format–including after the sponsor changes administrators.

2. The IRS expects the administrator to collect documentation in support of any hardship withdrawal–saying “[i]t’s not sufficient for plan participants to keep their own records of hardship distributions.”

In an effort to streamline plan administration, some third-party administrators have promoted a simplified procedure that would allow employees to get hardship withdrawals without submitting documentation.  Under the simplified procedure, the employee would complete an on-line form that certifies the purpose of the withdrawal (for example, to cover a medical expense or to avoid eviction) and provides details about the financial need. But the employee would not have to submit written documentation in support of the request for a hardship withdrawal: it would be up to the employee to retain the written documentation.

In support of the simplified procedure, the administrators have noted that the IRS’s regulations on hardship withdrawals do not specify the documentation that is required in support of a hardship withdrawal. In addition, postings on the IRS website have described the need to obtain “statement or verification” of the hardship–without expressly stating that written documentation is required.

The latest IRS posting changes this tune. For the first time, the IRS expressly states that plan sponsors should retain documentation of a hardship request and that “electronic self-certification is not sufficient documentation of the nature of a participant’s hardship.”

The IRS’s post in Employee Plans News does not have the same legal weight as a regulation, but it reflects a position the IRS is taking in plan audits–with support from the National Office. In light of the announcement, employers might wish to review their administrators’ procedures on hardship documentation.