Last month, the IRS issued its final regulations relating to hardship distributions from employee-sponsored retirement plans, including 401(k) and 403(b) plans. These regulations come in response to statutory changes affecting hardship distributions contained in the Bipartisan Budget Act of 2018. The objective: to provide one general standard for determining whether a distribution is necessary — thus simplifying the rules.
If your firm offers retirement benefits, here’s what you need to know:
According to the IRS, a hardship distribution is a withdrawal from an elective deferral account due to an immediate and substantial financial need, limited to the amount necessary to satisfy that need. The money is not paid back to the borrower’s account, but is taxed to the participant.
What constitutes financial need?
Under the new regulations, distribution is treated as necessary when the following requirements are satisfied:
- The employee has obtained all other distributions available under the plan, as well as all deferred employer compensation plans
- The employee has provided a written representation to prove insufficient funds to satisfy the need, and the plan administrator does not harbor any knowledge that conflicts with the representation
- The distribution amount doesn’t exceed the amount required to satisfy the financial need, including any monies needed to cover taxes or penalties resulting from the distribution
What’s changed?
A distribution is not treated as necessary to meet an employee’s urgent financial need if the need may be relieved from another reasonably available resource, including a spouse’s assets. Hardship withdrawals can also be extended to the employee’s primary beneficiary for qualifying educational, medical and funeral expenses. Going forward, hardship withdrawals may also be made from an employee’s elective contributions, as well as the matching contributions from employers — including the earnings on the savings.
Hardship-related amendments in the legislation include:
- Elimination of the six-month suspension requirement for employee elective deferrals following receipt of a hardship distribution
- Elimination of the requirement that available retirement plan loans be taken before a hardship distribution is granted
- Inclusion of employer-provided qualified non-elective contributions (QNECs) and qualified matching contributions (QMACs) and their earnings — as well as any income on employee elective deferrals — in hardship distributions
What does this mean for your business?
Plan sponsors are now tasked with ensuring that retirement plan documents are in compliance with the newly-issued hardship distributions. Plans that currently allow hardship distributions will need to be amended to reflect the final regulations by December 31, 2021. Operational changes, however, must comply with the amendments by January 1, 2020.
Questions? Reach out — we’re happy to discuss these changes and their impact in more detail.