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READER POLL: Slow But Positive Start for New Hardship Rules

Industry Trends and Research

Roughly a year ago, the Bipartisan Budget Act of 2018 brought with it some “loosening” of the rules pertaining to hardship distributions, effective for plan years starting after Dec. 31, 2018. But while the word has gotten out, readers aren’t yet seeing much impact.

Recall that, generally speaking, the changes made it easier for participants to get, and to get more, when requesting a hardship distribution – and many of the “penalties” associated with taking a hardship distribution (like a 6-month suspension of contributions, imposed to help assure that the circumstances were truly a hardship, though some might argue they simply exacerbated the situation) are removed. Moreover, the criteria for hardship has also been expanded to include things like natural disaster casualty losses (for more details, see IRS Issues New Guidance on Hardship Distributions). 

A full two-thirds of respondents to this week’s NAPA-Net reader poll have communicated those changes to their plan sponsor clients, while another quarter have done so with most, though not all – and the rest… hadn’t.

Plan Sponsor Response

That communication notwithstanding, a plurality (42%) noted that their plan sponsor clients didn’t seem to care about the change, though another third indicated “they’ve been pleased.” As for the rest (25%) – they were “letting their recordkeeper/TPA worry about it.” As one reader explained, they had “received minimal feedback from our clients but believe they are relying on their financial advisor, TPA or provider to worry about.”

We also asked if those changes were in place with the plans with which they worked, just under a third (31%) said it was, while another 46% said it was for most, but not all. Another 15% said it was in place, but only for some. The rest were in an “other” category which was something of a hybrid, like the reader who commented, “nearly all clients are allowing the new hardship categories, sources, and are eliminating the six-month suspension immediately, but many are still requiring that loans be exhausted prior to hardship.”

Changes for the Better?

So – how did readers personally feel about the changes in hardship provisions? Well, a plurality (36%) found them to be both positive and negative, while 29% felt they were (just) positive, while 7% thought they were (just) negative. Approximately 9% classified them as good in the short-term, though they weren’t as sure about the long-term. The rest were technically in an “other” category, but all seemed to fall in a “mostly good” category. As one reader explained, “All good except the continuance of 403(b)(7) hardship restrictions, which are complicated and make no sense, and the 2020 participant documentation requirement, particularly for small employers who might have actual knowledge of an employee's situation that is contrary to what he/she certified.” 

Another reader commented that they were “Basically good, as it means the administration is easier (no more stopping and starting deductions, no more having to subtract earnings from the amount available, no more loan (and many opportunities to mess that up) first, etc.) so from that standpoint alone less room for error is better for the plan. But is it better for participants? In many cases the ‘loan first’ ends up defaulted anyway, so maybe it’s not a big deal, but easier access to getting money out of the plan is generally not a good thing.” Yet another reader cautioned, “If the rules are being applied correctly and documentation is obtained to support a true hardship, that can be positive for a participant in that they can get to their assets in the time of a true crisis. However, the taxes and penalties is likely to be a negative as many may well deplete their retirement savings and have to start over, a definite negative. Good for the government because they get their taxes and penalties. I still believe taking a loan and paying yourself back is better than a hardship withdrawal in many cases. Once the money’s gone; it’s gone! Participants need to keep moving forward, not backward.”

Five, High?

We also asked readers to rank the proposals on a scale from 1 to 5, with “1” being “this is going to be a problem” to “5” being “wonderful idea.” Far and away, the most popular new option was eliminating the post-withdrawal 6-month suspension of elective deferrals, rated a “5” by nearly three-quarters (72%), with the ability to qualify for a hardship distribution in the case of casualty losses and losses associated with federal disaster areas a distant second (rated a “5” by more than half (57%) of this week’s respondents). 

Readers were most skeptical of changes in the administrative process required to document that a participant has demonstrated the requisite financial need – about this option 14% said, “this is going to be a problem,” and 43% were “okay with it,” though one in five said they were “mostly fine, just a bit worried about possible implications.”

On the other hand, readers varied in their opinions of “eliminating the requirement for participants to take plan loans first” and “the ability to include additional plan account sources (beyond 401(k) pre-tax) in hardship distributions.”    

Reader Comments

There were, as you might expect, a number of reader comments. Here’s a sampling:

  • “If a plan uses the safe harbor reasons for hardship, I don’t think that hardships will increase in number. It will only result in an employee (possibly) being able to get more money out for their hardship. I am 100% in favor of an employee being able to continue their deferrals following a hardship. Many times, the employee wants to continue participating but needs a lump sum of money to assist them with a financial situation that, otherwise, they may not have had the funds to take care of.”
  • “Prudent clients will probably require loan exhaustion to steer employees away from retirement balance-wrecking hardship distributions, but it is nice that plan sponsors have a choice here.”
  • “As a TPA, we haven't reduced/changed the burden of proof for hardships at all. Nor do we intend to. However, if a plan sponsor insists, then we'll accommodate their wishes.”
  • “Administrative process shouldn't be a problem, documentation is required to justify the hardship. If the documentation isn’t getting done correctly, accessing retirement assets just got a whole lot easier, basically no restrictions to access.”

Thanks to everyone who participated in this week’s NAPA-Net reader poll!

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