“But what if we want to keep the hardship distribution rules that we have in place currently? For example, we prefer that participants exhaust all in-plan loan availability prior to taking a hardship distribution, since it prevents plan leakage. Will we be forced to remove the requirement that all available loans be taken from our 403(b) plan before a hardship distribution may be issued?”
Stacey Bradford, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:
That is an excellent question, since many plan sponsors do feel that this particular provision in their retirement plans does minimize plan leakage, thus preserving retirement plan accumulation for their intended purpose; namely, retirement! And the good news is that, like most of the new hardship distribution rules, this new provision eliminating the requirement to take all available plan loans prior to taking a hardship distribution is an optional provision, meaning that plan sponsors are not required to adopt it.
However—and this is a major issue—the Internal Revenue Service (IRS) has yet to issue revised hardship distribution regulations, as they were directed to do under the Budget Act. Those regulations will provide important clarification as to whether the safe harbor hardship distribution provisions of the regulations will continue to apply to plans that do not adopt all or some of the new hardship distribution rules. The clarification is important, since plans that lose safe-harbor status for hardship distributions are subject to a facts and circumstances determination for each individual hardship distribution.
Thus, plan sponsors should stay tuned for future IRS guidance in this regard.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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