The Treasury Department and IRS have just published final regulations on hardship distribution options – along with some changes, and clarifications, from the proposed version. Have they taken hold? And what impact might they have? NAPA-Net readers weigh in.
By way of background, the Bipartisan Budget Act of 2018 (“BBA 2018”) directed the Secretary of the Treasury to “modify §1.401(k)-1(d)(3)(iv)(E) to (1) delete the 6-month prohibition on contributions following a hardship distribution and (2) make any other modifications necessary to carry out the purposes of section 401(k)(2)(B)(i)(IV).” Then on Nov. 14, 2018, the Treasury Department and the IRS published proposed regulations regarding hardship distributions. And, then, of course, just two weeks ago, the final regulations were published.
Talking ‘Points’
Not surprisingly, NAPA-Net readers have been out talking with their plan sponsor clients on the subject. Roughly 3 in 10 responded yes, while nearly as many had talked about it, but not since the final regulations had been published. The remaining third split between having told most, but not all of their clients, some, but not all of their clients – and “Are you kidding, it’s only been a week.” As one reader explained, “We’re working on it…”
As for plan sponsor response(s) to that update – well, there didn’t seem to be much. Nearly half (47%) said their clients “don’t seem to care,” while just over a third (35%) were “letting their recordkeeper/TPA worry about it.” However, the remaining 18% said their clients had been “pleased.” As one reader explained, “Some adopted changes after the proposed rules, since they were allowed to rely on them.”
Of course, there are responses – and there are responses. Just over a third (35%) said the rules were already in place at most of their clients, and nearly a quarter (24%) said they were already in place at all of their clients, while another 23% said they were in place at “some” of their clients. The rest were in “not yet” territory.
Opinion ‘Aided’
Asked their opinion of the rule changes, a plurality (35%) said they were “both positive and negative,” though 29% felt they were simply positive. Only about 6% were inclined to call them negative, and the rest opined that they were “good in the short-term, not as sure about the long-term.” As one reader explained, “The optional provision to encourage hardships before loans is particularly destructive to participant account balances, imo.”
“Mostly positive,” commented another, who went on to say, “but we are struggling with the ‘unless the employer has actual knowledge’ part – since we (in a ministerial fashion) approve/process hardships. We don’t know what they know and don't know if what they know will impact our ability to continue processing hardships.”
“Glad the 6-month suspension is eliminated,” noted one reader. “We think it is still important to gather documentation to justify the hardship to prevent too much abuse.”
Rank File
Indeed, asked to rank the key provisions, the elimination of the post-withdrawal 6-month suspension of elective deferrals was widely considered to be a “wonderful idea” by two-thirds of this week’s respondents.
Respondents were of a mixed mind when it came to eliminating the requirement that participants take a plan loan before taking hardship; cited as a wonderful idea by 42% – but as “I’m OK with it” by just as many. Respondents were similarly split in their assessment of the ability to qualify for a hardship in the case of casualty losses and losses associated with federal disaster areas; 47% saw it as “wonderful,” while 35% were “OK with it.”
Respondents didn’t really seem to find much fault with the key provisions. The closest? The quarter (24%) who labeled “changes in the administrative process required to document that a participant has demonstrated the requisite financial need” as “this is going to be a problem.”
Other Comments
In commenting on the regulations, and prospects for the future, readers had a number of interesting things to say. Here’s a sampling:
“The IRS kind of laid an egg by not addressing the implications for non-qualified deferred compensation plans in the proposed rules. They (sort of) cleaned that up in the final rules.”
“So far, the removal of the suspension has resulted in the same participants who frequently take hardships to take more hardships. I’m not sure that’s a good thing.”
“We have not seen a significant increase in hardships as our clients have adopted these new regs as the Fidelity study shows.”
“The amount of time between the proposed rules and the final rules make it difficult for recordkeepers to plan in advance. Luckily, we anticipated the final rules would virtually mirror the proposed rules and moved forward with technology and administrative changes.”
“Hopefully, plan sponsors will continue to encourage loans over balance-killing hardship distributions.”
“Anything that makes a hardship ‘easier’ (e.g., more safe-harbor reasons to get one, more sources available, no deferral suspension period, no required loan first) sure makes it better administratively as there are fewer chances for operational errors. But on the other hand do we really want to allow participants every opportunity to drain their retirement accounts before they actually retire?”
Good point.
Thanks to everyone who participated in our weekly NAPA-Net Reader Poll!
We asked similar questions of readers back in February – it makes for an interesting comparison.
