HARDSHIP DISTRIBUTION CHANGES IN 2019
On February 9, 2018, the Bipartisan Budget Act of 2018 (BBA) was signed into law and included were changes to the “hardship distribution” rules applicable to qualified retirement plans. The IRS has now issued proposed regulations that clarify these new rules, which in 2019 will make it easier for participants to access their funds in the event of financial difficulties.
What are the current rules?
The IRS has specific requirements for a hardship distribution to be in compliance. The amount available must be limited to a participant’s immediate and heavy financial need. Additionally, the withdrawal may only be for a specifically listed type of expense. Among the qualifying expenses are purchase of a home, foreclosure/eviction, medical care and post-secondary tuition. To satisfy the IRS safe harbor, the participant must first take all available loans from the plan and any other distributions to which they are entitled. A participant also must suspend their 401(k) contributions for a 6-month period following a hardship withdrawal.
Hardship distributions under 401(k) Plans are also limited in the money “sources” from which funds may be withdrawn. While hardship distributions may be made from Salary Deferral accounts, it may not include the associated earnings, meaning that it is limited to a participant’s historical Salary Reduction total. Hardship withdrawals are also not allowed from 401(k) Safe Harbor monies, which are very prevalent today.
What changes does the BBA make?
While the BBA doesn’t change the “immediate and heavy financial need” requirement, it does tweak things by no longer forcing a participant to first take a loan from the plan. The 6-month suspension period for making 401(k) contributions is also eliminated. The BBA expands the money sources from which a hardship distribution may be made, allowing all Salary Reduction and Safe Harbor monies to be available. Withdrawals for certain expenses -- educational, medical & funeral -- may now be made if the expenses are incurred by the participant’s primary beneficiary.
From the plan sponsor’s standpoint, one new requirement is that the participant will need to represent in writing that he or she does not have the cash or other liquid assets to meet their financial need.
The removal of the 6-month suspension period is a mandatory change. Others, such as the expansion of the money sources, are optional on the part of the plan sponsor. In other words, if the plan sponsor would prefer to continue to limit the available monies for hardship, they may continue to do so.
While plans may operate under the new rules beginning January 1, 2019, amendments will eventually be required to formally update plan provisions.