Most 401(k)s Embrace New Hardship Rules

According to PSCA, relatively few sponsors have seen participants taking out excess hardship withdrawals.

Nearly two-thirds, 64.6%, of 401(k) plan sponsors have embraced the new hardship withdrawal rules established by the Bipartisan Budget Act of 2018, according to the Plan Sponsor Council of America (PSCA).

The Act directed the Secretary of the Treasury to modify the rules. In September of this year, the Treasury Department and the IRS issued final regulations. They broadened the definition of hardship withdrawals, reduced the penalties for taking one and eliminated the six-month prohibition on contributions following a hardship distribution. The final regulations went into effect in September.

While Fidelity has found that the number of hardship withdrawals taken out spiked by 40% in the first half of this year, while the number of loans decreased by 7%, PSCA found that 72.6% of employers have not seen any meaningful change in the number of hardship withdrawals taken since the new provisions were implemented. Some 17.8% saw an uptick in hardship withdrawals, according to PSCA.

According to PSCA’s research, 60% of sponsors thought the elimination of the six-month moratorium on contributions is a wonderful idea. About half said they were “OK” with the provisions to allow for hardship withdrawals for casualty losses associated with federal disasters. Nearly 30% said the requirement that participants take loans before accessing a hardship withdrawal is a bad idea. The new rules make it easier for people to take out a hardship withdrawal without first taking out a loan.

“Pre-retirement distributions of retirement savings continues to be a matter of concern,” says Hattie Greenan, director of research at the Plan Sponsor Council of America. “Congress’ action to liberalize the requirements for hardship withdrawals is a welcome change for those who use 401(k) monies to stave off financial ruin, or cope with emergencies. However, because of the potential long-term impact of expanded hardship withdrawals, it is critical to keep a close eye on how these changes might affect retirement security.”