Here are seven tips for employers to remain compliant regarding financial distributions from 401(k) plans:
1. Include language in your plan document regarding the circumstances for which distributions can occur. (Include definition of hardship distributions.)
2. If the loan document allows loans, then all nontaxable loans should be made prior to making a hardship distribution.
3. If a hardship distribution is made, be sure that the distribution does not exceed the total elective contributions.
4. Retain hardship application files in case of an IRS audit.
5. If an employee receives a hardship distribution, then he or she is prohibited from making elective contributions for at least six months after the distribution is received.
6. Participant account statements need to document elective contributions vs. other types of contributions, such as employer contributions.
7. File form 1099-R for all employees who receive distributions.