In the fall of 2019, the IRS finalized the changes to the regulations governing hardship withdrawals from a 401(k) plan, pursuant to changes in the Bipartisan Budget Act of 2018.
Many of these final changes are identical to the proposed changes that were originally published by the IRS in November 2018. These changes allow plan participants greater access to funds from their retirement accounts when they are experiencing financial need.
Following are the key changes to the regulations:
1. Under previous regulations, there was a 6-month prohibition on a plan participant making elective contributions into their 401(k) plan following a hardship withdrawal. The new regulations remove this ban. This change is mandatory, therefore beginning on January 1, 2020, plans will not be allowed to suspend contributions following a hardship withdrawal.
2. Previous regulations required plan administrators to take into account all relevant facts and circumstances to determine if a hardship withdrawal was appropriate. Under the new regulations, there is now one standard to determine whether a withdrawal is necessary to satisfy a financial need. Plans are required to apply this new standard for distributions on or after January 1, 2020. Under this new standard, a hardship distribution can be taken if the following three circumstances are met:
- The hardship withdrawal may not exceed the amount of an employee’s need (including amounts necessary to pay federal, state or local income taxes and penalties reasonably anticipated to result from the distribution);
- Plan participants must have first accessed any other money available to them from the employer or plan sponsor (such as through a deferred compensation plan, ESOP, or similar);
- The plan participant must provide a representation that they have insufficient liquid assets available to satisfy the financial need. Unless the plan administrator has knowledge to the contrary, they are able to rely on this representation from the plan participant.
3. The previous requirement to take any loans available to the participant under the plan, prior to obtaining a hardship distribution, has been eliminated. Plans now have the option to either allow participants to immediately take a hardship withdrawal or continue to require participants to first take a plan loan before they take a hardship withdrawal.
4. Under previous regulations, a plan participant could only take a hardship withdrawal from the contributions they made into their 401(k) account. New regulations allow access to additional pools of money for a hardship withdrawal, including earnings on 401(k) contributions and matching contributions. This regulation is optional for the plan to elect to adopt.
5. An additional category has been added for what qualifies as an immediate need (safe harbor) for a hardship withdrawal: disaster-related expenses and losses (including loss of income) of a plan participant who lives or works in a federally-declared disaster area at the time of the disaster. The plan sponsor has the option to make this change when the plan is amended for the other changes to the regulations noted above, or wait until a disaster occurs to add this provision. If the latter option is chosen, the plan would need to adopt a plan amendment by the end of the plan year that the amendment is first in effect.
contact a member of the Employee Benefit Services Group.
It is the expectation of the IRS that plan sponsors will need to amend their plan’s provisions related to hardship withdrawals to reflect these changes to regulations- both those that are mandatory, and those that are optional but that plan management chooses to adopt. All such amendments must be effective for hardship withdrawals beginning on or after January 1, 2020. For plans that are individually designed and non-governmental, the deadline to amend the plan documents for these provision changes is the end of the second calendar year that begins after the issuance of the Required Amendment List (RAL) that includes the changes. For example, if these changes are included in the 2019 RAL, the deadline to amend the plan documents will be December 31, 2021.
Employee Benefit Services