The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from Illinois is representative of a common inquiry related to hardship distributions. The advisor asked:
“Are the rules for hardship distributions from 401(k) plans changing?”
Highlights of the Discussion
Yes, changes to the hardship distribution rules for 401(k) plans as a result of the Bipartisan Budget Act of 2018 will take effect for the 2019 plan year (e.g., as of Jan. 1, 2019, for calendar year plans). There are three primary changes to the current hardship distribution rules. Participants:
- will not be required to take plan loans before a hardship distribution is granted;
- will not need to suspend their employee salary deferrals for six months following a hardship withdrawal; and
- will be able to distribute other types of contributions beyond employee salary deferrals and grandfathered, pre-1989 earnings thereon as part of a hardship distribution, including qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), safe harbor contributions, and earnings from all eligible sources (including post 1988 earnings on elective deferrals).
Items 1 and 2 are currently part of the IRS’s requirements for a hardship distribution to meet the safe harbor definition of “necessary to satisfy an immediate and heavy financial need.”
In order to implement the new provisions, plan sponsors will need to:
- update their hardship distribution procedures;
- ensure plan record keepers are making necessary administrative changes; and
- review plan document language for necessary amendments.
We believe it was Congress’ intent to have the same changes apply to hardship distributions from 403(b) plans, but clarifying guidance from the IRS is needed. Treasury regulations under Section 403(b) of the Internal Revenue Code state that a hardship withdrawal from a 403(b) plan has the same meaning, and is subject to the same rules and restrictions, as a hardship withdrawal under the 401(k) regulations [see Treas. Reg. §1.403(b)-6(d)(2)]. The Treasury Secretary has until early 2019 to modify the current 401(k) regulations to reflect the new hardship distribution rules.
Conclusion
Come 2019, plan sponsors may incorporation softer hardship distribution rules into their plans, policies and procedures as a result of changes under the Bipartisan Budget Act of 2018.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2018, Retirement Learning Center, LLC. Used with permission.
