The IRS recently made a number of significant changes to the regulations applicable to hardship distributions from 401(k) and 403(b) plans.
If a plan allows hardship withdrawals, it must be amended to comply with the following changes:
- Previously, an employee who received a hardship distribution was suspended from deferring income for at least six months. Under the final regulations, 401(k) and 403(b) plans cannot apply this suspension on or after January 1, 2020.
- Plan participants can now receive a hardship distribution due to a home casualty loss unrelated to a natural disaster. Participants with principal residences or places of employment in a FEMA-declared disaster area can take a hardship distribution for any expense or losses related to the disaster, including losses of income or personal property. The following are still deemed hardship events: medical expenses, home purchase costs, college costs for the next 12 months, payments to prevent eviction/foreclosure, and funeral expenses.
- Plans must specify if participant loans are no longer required to be taken before a hardship withdrawal is distributed.
- The criteria to determine if a hardship distribution is necessary was changed significantly. Plan sponsors may now approve a hardship withdrawal if all of these requirements are met:
- The distribution may not exceed the amount of an employee’s “financial needs,” including amounts needed to pay federal, state, or local income taxes or penalties reasonably anticipated as a result of the distribution.
- All available distributions from the plan (or other plans maintained by the employer) have been obtained prior to the hardship distribution request.
- The employee must provide a certification in writing or via electronic media stating that they have insufficient liquid assets reasonably available to satisfy the financial need.
The following changes are optional, but also require plans to be amended to implement:
- 401(k) plans may allow hardship distributions from elective deferrals, qualified non-elective contributions, qualified matching contributions, and safe harbor contributions, including qualified automatic contribution arrangements. The hardship distributions can include all associated earnings.
- Non-custodial 403(b) plans may only expand hardship withdrawals to other sources, but not to the earnings on those contributions. Custodial 403(b) plans are not allowed to expand their hardship withdrawal sources.
- The plan may extend hardship distributions to a “primary beneficiary
under the plan” for qualifying medical, education, and funeral expenses.
There are various effective dates, some as early as January 1, 2018. The mandatory provisions must be effective no later than January 1, 2020.
If you would like more information or have questions about the changes to the hardship withdrawal rules, please contact Connie Lee at [email protected] or 844.4WINDES (844.494.6337).