On September 23, 2019, the U.S. Treasury Department and the IRS published final regulations amending the rules governing hardship distributions for both 401(k) and 403(b) retirement savings plans. These regulations reflect the changes made by both the Tax Cuts and Jobs Act of 2017 and the Bipartisan Budget Act of 2018. The new regulations make it easier for plan participants to access their savings for hardship reasons and also allows them to quickly start saving again following the hardship withdrawal.
The final regulations are summarized below:
Both 401(k) and 403(b) retirement savings plans will need to be amended to reflect the final regulations. Plans that currently permit hardship distributions will need to make the amendments by December 31, 2021; however, operational changes will need to comply with the new regulations by January 1, 2020. Plan sponsors may also choose to amend their plans to comply with permissible, but non-mandatory provisions of the final regulations as listed in some of the optional regulations below.
Mandatory and effective for hardship distributions on or after January 1, 2020, the plan sponsor can no longer impose a six-month suspension of employee contributions after a hardship withdrawal from any qualified plan, 403(b) plan or governmental 457(b) plan. Eliminating the suspension could encourage more hardship distributions, but it also will encourage those plan participants who take distributions to start rebuilding their savings sooner. Eliminating the suspension is optional for the 2019 plan year.
Plan sponsors can eliminate the requirement that a plan participant must use available plan loans prior to receiving a hardship distribution. Eliminating the loan requirement is optional beginning with the 2019 plan year, so some plans may continue to require participants to take a plan loan before qualifying for a hardship distribution.
The final regulations permit (but do not require) a 401(k) plan sponsor to expand the permitted sources by allowing hardship distributions from plan accounts holding elective deferrals including Qualified Non-Elective Employer Contributions (QNECs), Qualified Matching Contributions (QMACs), traditional safe harbor contributions, and all earnings regardless of when contributed or earned. The regulation also includes special rules for 403(b) plans, which limits amounts available for distribution. The option to expand eligible amounts is effective beginning with the 2019 plan year.
Mandatory for hardship distributions made on or after January 1, 2020, the “relevant facts and circumstances” test is eliminated in determining whether a distribution is necessary to satisfy a financial need. The new standard has introduced three objectives for 401(k) and 403(b) plans:
The elimination of the relevant facts and circumstances test is optional for the 2019 plan year.
The final regulations add to the list of distributions deemed to be an immediate and heavy financial need. Beginning with the 2019 plan year, expenses and losses (including loss of income) incurred as a result of a disaster declared by the Federal Emergency Management Agency (FEMA) are included only if the participant’s principal residence or principal place of employment is located in the designated disaster area. According to the IRS, the agency will no longer need to issue special disaster relief announcements to permit hardship withdrawals to those affected by federally declared disasters.
Now that the final regulations have been issued, it is the responsibility of plan sponsors to review their plan’s hardship withdrawal procedures and determine what provisions will be adopted to comply with the new regulations. It is also the plan sponsor’s responsibility to update any participant communications, including the summary plan description and safe harbor notice, if applicable, to ensure they reflect the upcoming changes. Also keep in mind the general rule for safe harbor notices is that they be provided to participants within a reasonable period before the beginning of the plan year. This means for the 2020 plan year, these notices must be provided to participants at least 30 days (and not more than 90 days) before the beginning of the plan year.
Contact Sarah Lee at email@example.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.
Receive insights from our specialists in a variety of areas and timely information on upcoming events directly to your inbox as they go live in our online Knowledge Center.