Final Hardship Regulations
In September, the IRS issued final regulations for hardship distributions. There are few changes between the final regulations and the previously proposed regulations. Many of the provisions in the proposed regulations were already put into effect by plan sponsors in 2019. Now that the regulations are final, plan sponsors need to adopt formal hardship amendments.
- For both pre-approved 401(k) plan documents and individually-designed plans, the amendment deadline is December 31, 2021.
We are currently providing the required amendment to plan sponsors whose 401(k) plans are on the Blue Ridge volume submitter document.
A summary of the changes is as follows:
- Elimination of the six-month suspension period for employee contributions following a hardship withdrawal. This is mandatory for hardship withdrawals after January 1, 2020. It was optional for such withdrawals in 2019.
- Optional elimination of the requirement that participants take available plan loans before requesting a hardship distribution.
- Hardship withdrawals sources are expanded to include earnings on salary deferral contributions along with Safe Harbor contributions, qualified nonelective contributions and qualified matching contributions.
- Most plans follow the safe harbor rules in defining criteria that qualify for a hardship withdrawal. That includes prevention of foreclosure of a principal residence, medical expenses, etc. The safe harbor criteria included casualty losses. The regulations provide that casualty losses related to damage to a principal residence do not need to be limited to federally declared disaster areas.
- The regulations added an additional safe harbor withdrawal opportunity for expenses and losses (including loss of income) incurred by the employee on account of a disaster declared by FEMA, provided that the employee’s principal residence or principal place of employment at the time of the disaster is in an area designed by FEMA for individual disaster assistance.
A distribution will be considered necessary to satisfy an immediate and heavy financial need of the Participant if:
- It is not in excess of the amount required to satisfy the hardship need (including amounts necessary to pay federal, state or local taxes reasonably anticipated to result from the payout.
- The participant has obtained all other currently available distributions, other than hardship distributions, under any deferred compensation plan maintained by the employer.
- Effective for distributions on or after January 1, 2020, the participant represents in writing or by electronic medium that he has insufficient cash or liquid assets to satisfy the need. (Note that hardship withdrawal request forms may need updating to include this representation.)
Nothing in the regulations prohibits a plan from imposing a minimum distribution amount or number of hardship withdrawals in a year. Plans are also permitted to retain requirements that a participant take available plan loans before a hardship distribution is requested.