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Insight Final Hardship Distribution Regulations Issued:Potential Plan Sponsor Action Necessary

By John C. Hughes,

Most retirement plans, such as 401(k)plans, allow plan participants to take distributions from their accounts while still employed if they experience an economic hardship. There are detailed laws and regulations that specify when and how much a plan participant may withdraw when facing a hardship. Plans are not required to allow hardship distributions, but if they do, it is important that employer plan sponsors abide by the applicable laws and regulations.

The Bipartisan Budget Act of 2018 (“BBA”) made some changes to the laws governing the distribution of 401(k) plan assets on account of hardship. The IRS issued final regulations relating to those changes in late September. The rules also apply to 403(b) plans. In summary, the BBA and the final regulations provide for the following changes:

  • In determining whether a distribution is necessary, an employer may rely on participant representations that he or she has insufficient cash to otherwise satisfy the financial need (as long as the employer does not know otherwise, and the participant has obtained available distributions from the employer’s other plans). There is no longer a requirement to first obtain a plan loan.
  • Plans may not suspend participant contributions as a condition to obtaining a hardship. Previously, a six month suspension was required.
  • Plans may allow a distribution of earnings on 401(k) contributions as part of a hardship distribution, as well as contributions made in the form of “QNECs” and “QMACs” (this may include amounts contributed as 401(k) “safe harbor” contributions).
  • Plans may allow for hardship distributions on account of home damage resulting from a federally-declared disaster, and for hardship distributions relative to “primary beneficiaries.” Both of these were generally already permitted, but are now further clarified.

The effective dates relative to the changes vary. Most plans modified their operations in 2019 to reflect the changes (or some of them), but did not yet adopt written plan amendments. Plan amendments will now be necessary. Unfortunately, the IRS did not take the opportunity to set a very clear path for determining the amendment deadline. Whether a particular employer plan sponsor will need to take action to adopt an amendment (and when) will vary depending on the plan and the employer’s specific desires relative to the permissive, as opposed to mandatory, changes.

Failure to timely amend and/or to ensure plan operations conform with the plan provisions will result in “qualification failures.” Accordingly, employers should consult with counsel and should be on the lookout for proposed amendments, or ask their plan document providers for a status on proposed amendments. Employers should also review their particular situations to ensure operations are consistent with their design objectives(and their plan terms). Changes to summary plan descriptions will also be required in most instances. The final regulations and the preambles(which provide very helpful commentary and background) may be found here — https://www.govinfo.gov/content/pkg/FR-2019-09-23/pdf/2019-20511.pdf.

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