As the result of the Bipartisan Budget Act of 2018, and the subsequent issuance of proposed Treasury regulations, hardship distributions should generally be easier for participants to obtain, assuming they are covered by a plan with a hardship provision and assuming that plan sponsors are on board with the hardship provision changes that are optional. Plan sponsors should be hearing from their recordkeepers and third party administrators regarding the default changes that will be occuring unless the plan sponsor:
- Makes other elections, or
- Decides to eliminate the hardship provision from its plan.
Key Considerations for Plan Sponsors
- Under the terms of the law and the proposed regulations (on which plan sponsors may rely), the requirement that elective deferrals be suspended for 6 months following a hardship distribution is eliminated. However, a plan sponsor could retain the 6-month suspension requirement until 1/1/2020. After that date, elimination of the suspension period is required.
- The requirement for a participant to take all available plan loans before requesting a hardship distribution may be eliminated. However, a plan sponsor could retain the loan requirement. However, please note that this provision does not eliminate the requirement to first take all other available distributions from all plans of the Plan Sponsor.
- The law and proposed regulations expand the funding sources for hardship distributions. That includes the earnings on salary deferral contributions, qualified non-elective contributions (QNECs), safe harbor contributions, etc. A plan sponsor could expand the current sources for hardship withdrawals or restrict such withdrawals to current sources that are already allowed in the document.
Where elected, the elimination of the 6-month suspension requirement can be effective January 1, 2019. All other changes are effective the first day of plan year after December 31, 2018. For a calendar year plan the changes can be effective January 1, 2019. For an off-calendar plan year (e.g. July 1, 2019 to June 30, 2020), the changes cannot be effective before the first day of the plan year (July 1, 2019).
Also note that the proposed regulations clarify that a hardship distribution is permitted for expenses relating to a casualty loss that is not in a federally-declared disaster area. The proposed regulations also add a new type of expense that a plan could potentially consider for hardship withdrawal purposes – any expenses and losses incurred as the result of certain disasters if the participant’s principal residence or principal place of employment is in a federally-declared disaster area.