Self-Certification of 401(k) and 403(b) Plan Distributions

With passage of the SECURE Act in 2019 and the SECURE 2.0 Act in 2022, 401(k) and 403(b) plan sponsors have been able, but not required, to provide participants with the ability to self-certify eligibility for certain withdrawals.[1] While self-certification reduces the oversight burden on administrators and increases accessibility for participants, questions are beginning to arise.

For instance, Plan Sponsor Council of America posted an article last month titled “Self-Certified Fraud?” and reported on Plan Sponsor Council of America’s “question of the week.” The question asked whether plan sponsors were seeing an increase in self-certified withdrawals and, particularly, fraudulent withdrawals. The responses were not surprising, but they are informative. “How would we know” was a common reply. Some plan sponsors reported an increase in distributions. Many commented that they did not adopt self-certification out of concern that it could be misused. 

We attended a retirement committee meeting earlier this year where the third-party administrator reported that more than half of all participants had taken self-certified qualified birth or adoption distributions and domestic abuse victim distributions.

With that background, this post reviews what the guidance provides regarding self-certification for (1) qualified birth or adoption distributions, (2) emergency personal expense distributions, (3) domestic abuse victim distributions, (4) qualified disaster recovery distributions, and (5) hardship distributions. As you will see, the guidance is limited and the rules are not uniform across distribution types. The post concludes with thoughts on additional guidance, oversight and process, and participant communications.

Self-Certification Guidance

1. Qualified Birth or Adoption Distributions – The SECURE Act added Section 72(t)(2)(H) to the Internal Revenue Code (the “Code”) providing that qualified birth or adoption distributions are not subject to the Section 72(t) 10% additional tax.

The legislation is silent regarding self-certification, but the IRS published Q&As in Notice 2020-68 stating:

In making a determination whether an individual is eligible for a qualified birth or adoption distribution, a plan sponsor or plan administrator . . . is permitted to rely on reasonable representations from the individual, unless the plan sponsor or plan has actual knowledge to the contrary.

Notice 2020-68 appears to impose two requirements: (a) the participant’s representation must be “reasonable”; and (b) the plan sponsor must not have any “actual knowledge” to the contrary.

Whether the representation is “reasonable” suggests some level of oversight to prudently determine that the certification is reasonable. For example, presumably the administrator should, at a minimum, review certifications to confirm they have been completed properly.

The second prong, actual knowledge, is perhaps more straightforward. The IRS explained in an analogous situation concerning coronavirus distributions that the requirement to not have “actual knowledge” does not mean there is an obligation to inquire into whether an individual has satisfied the distribution requirements. Instead, the requirement is limited to situations where the administrator possesses sufficiently accurate information to determine the veracity of a certification.

2. Emergency Personal Expense Distributions – The SECURE 2.0 Act added Section 72(t)(2)(I) to the Code providing that emergency personal expense distributions are not subject to Section 72(t)’s 10% additional tax.

With respect to self-certification, the legislation states:

The administrator . . . may rely on an employee’s written certification that the employee satisfies the conditions of [eligibility] in determining whether any distribution is an emergency personal expense distribution. The Secretary may provide by regulations for exceptions to the rule of the preceding sentence in cases where the plan administrator has actual knowledge to the contrary of the employee’s certification, and for procedures for addressing cases of employee misrepresentation.

The IRS has not issued regulations regarding the actual knowledge exception. The IRS did, however, issue the following guidance in Notice 2024-55:

In determining whether an employee is eligible for an emergency personal expense distribution, an administrator of an applicable eligible retirement plan is permitted to rely on an employee’s written certification that the employee is eligible for an emergency personal expense distribution.

Note that the IRS did not include the two-prong reasonable representation and actual knowledge tests, leaving open a question: Are self-certifications for qualified birth or adoption distributions to be treated differently from self-certifications for emergency personal expense distributions?

3. Domestic Abuse Victim Distributions – The 2022 SECURE 2.0 Act added Section 72(t)(2)(K) to the Code to allow penalty-free withdrawals in the case of domestic abuse.

Regarding self-certification, the legislation states:

Distributions Treated as Meeting Plan Distribution Requirements; Self-Certification. Any distribution which the employee or participant certifies as being an eligible distribution to a domestic abuse victim shall be treated as meeting the requirements of [applicable Code Sections]. [Emphasis added.]

The relevant guidance in Notice 2024-55 states:

[A]ny distribution that an employee or participant certifies as a domestic abuse victim distribution will be treated as meeting the distribution restriction requirements under the Code . . . . To meet the certification requirements . . ., the employee or participant could check the box on the distribution request form to certify that (1) the employee or participant is eligible for a domestic abuse victim distribution and (2) the distribution is made during the 1-year period beginning on any date on which the individual is a victim of domestic abuse. [Emphasis added.]

Note that the certification provisions for domestic abuse victim distributions are different from both qualified birth or adoption distributions and emergency personal expense distributions. There is no reference to “reasonable certifications” or “actual knowledge” exceptions, and no statement that an administrator “may” or is “permitted to” rely on a certification. Instead, the language indicates that the certification “shall” or “will” be treated as meeting the requirements. If a plan administrator had actual knowledge to the contrary, could it allow the distribution, or would such a distribution violate ERISA duties or create an operational failure?

4. Qualified Disaster Recovery Distributions – The SECURE 2.0 Act added Section 72(t)(2)(M) to the Code to allow penalty-free withdrawals in the case of qualified disasters.

The legislation is silent regarding self-certification, but the IRS issued Fact Sheet 2024-19 which states:

A plan sponsor or plan administrator is permitted to rely on a participant’s reasonable representations that the participant is a qualified individual who qualifies for this special treatment for distributions and loans, unless the plan administrator (or other responsible person) with respect to the qualified employer plan has actual knowledge to the contrary.

Like qualified birth or adoption distributions under Notice 2020-68, qualified disaster recovery distributions are also subject to a two-prong test – there must be a “reasonable representation” and no “actual knowledge” to the contrary.

5. Hardship Distributions – The SECURE 2.0 Act amended Code Sections 401(k)(14) and 403(b)(7)(D) to provide that employees can self-certify that they are eligible for a hardship distribution. The statue provides that:

[T]he administrator of the plan may rely on a written certification by the employee . . . . The Secretary may provide by regulations for exceptions to the rule of the preceding sentence in cases where the plan administrator has actual knowledge to the contrary of the employee’s certification, and for procedures for addressing cases of employee misrepresentation.

Accordingly, hardship distribution certifications are subject to the same rules as the emergency personal expense distributions certifications. That is, the administrator “may” rely on a certification and the IRS “may” provide regulations regarding actual knowledge to the contrary. The IRS has not provided regulations.

Summary

The following chart summarizes the rules regarding reliance on self-certifications:

Conclusions

The chart above illustrates the need for additional IRS guidance. Guidance would be especially welcome as self-certification becomes more popular. Initial guidance might include:

• An explanation of the “actual knowledge” exception that addresses the meaning of actual knowledge and whose knowledge matters (e.g., not simply “the plan sponsor,” but who within the employer).
• An explanation of what is considered a “reasonable representation” and the steps that should be taken to make that determination.
• Clarification of whether the “actual knowledge” and the “reasonable representation” requirements apply across all five distribution types, and if the requirements do not apply uniformly, an explanation of which requirement applies to which distribution.

While awaiting additional guidance, plan administrators may look to two ERISA guiding principles to address self-certifications: the duty to follow the terms of the plan document (provided the document complies with ERISA), and the duty to act prudently. These principles suggest that a plan administrator can and should implement a thoughtful oversight policy and process regarding self-certification.

The level of oversight and the specifics of the policy will be unique to each plan administrator, but as a starting point the following should be considered:

• Adopt a written policy regarding self-certification. The policy should identify roles and responsibilities and could incorporate “reasonable representation” and “actual knowledge” guidelines.
• Regularly review the number and type of distributions. Over time, this information will reveal distribution patterns and year-over-year changes and should help administrators monitor self-certifications.
• Ensure certification forms outline the eligibility criteria for the distribution type, and require meaningful acknowledgement by the participant (e.g., require a signature, not simply the click of a button).
• Confirm certifications are fully completed and appear compliant on their face.
• Consider limiting the number of self-certified distributions. One national third-party administrator limits participants to two self-certified distributions per year as its default rule.
• Be prepared to act if an issue arises.
• Document compliance with the policy.

Finally, administrators should clearly communicate to participants the possible consequences of a false self-certification. Consequences may include imposition of the 10% tax under Code Section 72(t) (plus interest and penalties, if paid late), recovery of the distribution for recontribution to the plan (plus earnings), responding to IRS or plan auditor inquiries, amended tax forms, and discipline under applicable employer policies.

In summary, additional IRS guidance is welcome as self-certification becomes more common. While self-certification can reduce administrative burden, it is not a “set it and forget it” feature and thoughtful oversight is advisable. Finally, participants should be made aware of possible consequences in the event of incorrect certifications.

If you have questions about administration of participant self-certifications, please contact any member of Verrill’s Employee Benefits & Executive Compensation Group

[1] Although the self-certification concept has been extended to governmental 457(b) plans and IRAs, this post focuses on 401(k) and 403(b) plans.