Tax News & Views: Health Care Edition
June 2017 | Vol. 12 No. 36
Tax News & Views: Health Care Edition is a timely news summary bulletin authored by the Health Care Industry Group, Deloitte Tax LLP. The newsletter contains highlights from the latest tax developments in health care on Capitol Hill, at the White House, at the Internal Revenue Service, at the Treasury Department and in the courts. It is a valuable resource for tax and other professionals involved in the tax-exempt health care providers and health plans sectors, helping them remain current on tax developments that stand to have an impact on their businesses.
- Substantiation Guidelines Released for Hardship Distributions
- Did you know?
- Additional Resources
- Subscribe and Archives
Substantiation Guidelines Released for Hardship Distributions
On February 23, 2017, the Employee Plans (EP) Division issued Substantiation Guidelines for Safe-Harbor Distributions for Section 401(k) Plans to EP Examinations employees. Subsequently on March 7, 2017, the EP Division issued Substantiation Guidelines for Safe-Harbor Hardship Distributions from Section 403(b) Plans to EP Examinations employees. The memoranda discuss permissible ways that an employee who requests a hardship distribution can substantiate the reason for a hardship distribution. The 401(k) memorandum discusses the hardship distribution requirements and the permissible substantiation requirements in detail. The 403(b) memorandum refers to the 401(k) memorandum for the similar substantiation requirements applicable to hardship distributions from 403(b) plans.
Under the Code and regulations, a participant may take a distribution from his or her 401(k) or 403(b) elective deferrals prior to termination of employment or attainment of age 59 ½ only on account of a hardship. The regulations provide that the following expenses are deemed to constitute a hardship:
- Expenses for medical care deductible under Section 213(d) for the employee or the employee’s spouse, children, dependents, or primary beneficiary under the plan;
- Costs 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, dependents, 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 of burial or funeral expenses for the employee’s deceased parents, spouse, children, dependents, or primary beneficiary under the plan; or
- Expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction.
The memoranda discuss how an employer may prove to an IRS examiner whether hardship distributions were received based on one of the permissible hardship criteria. The memoranda provide the employer with two alternatives. First, the employer or third party administrator is permitted to obtain source documentation from the employee. Alternatively, the employer or third party administrator may obtain a certification from the employee that the employer has a permitted hardship. If the employer or plan administrator uses the employee certification procedures, then, per the memoranda, employers must provide the following notifications to the employee receiving the hardship distribution:
- The hardship distribution is taxable and additional taxes could apply.
- The amount of the distribution cannot exceed the immediate and heavy financial need.
- Hardship distributions cannot be made from earnings on elective contributions or from QNEC or QMAC accounts, if applicable.
- The recipient agrees to preserve source documents and to make them available at any time, upon request, to the employer or administrator.
If you have questions on these types of distributions, please reach out to your Deloitte contacts.
Did you know?
IRS Requests Comments on Charitable Contribution Regulations
The IRS has requested comments on Treasury Regulations Section 1.170A-1, Section 1.170A-13, and Section 1.6115-1 which provide guidance regarding the allowance of certain charitable contribution deductions, the substantiation requirements for charitable contributions of $250 or more, and the disclosure requirements for quid pro quo contributing in excess of $75. Comments are invited on:
- Whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility;
- The accuracy of the agency’s estimate of the burden of the collection of information;
- Ways to enhance the quality, utility, and clarity of the information to be collected;
- Ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology; and
- Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information. Comments should be submitted on or before June 19, 2017.
The source for health care insights: The Deloitte Center for Health Solutions (DCHS) is the research division of Deloitte’s Life Sciences and Health Care practice. The goal of DCHS is to inform stakeholders across the health care system about emerging trends, challenges, and opportunities.
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