Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:
Yes, but it would be a bit misleading to state that the final 403(b) regulations were the cause of the issue, since the distribution restrictions that would affect your plan date back to 1989. Specifically, the issue is with employer contributions; elective deferrals may be withdrawn for reasons of financial hardship similar to a 401(k) plan. However employer contributions to mutual funds, otherwise known as 403(b)(7) custodial accounts, may NOT be distributed in the event of financial hardship. See Code section 403(b)(7)(A)(ii). Note that this is a significant difference between the other type of investment generally permitted in 403(b) plans, annuities (fixed or variable). Hardship distributions ARE permitted from 403(b)(1) fixed or variable annuities. (There is a grandfather for amounts held in a 403(b)(7) account as of 12/31/1988, but not earnings thereon, but as you are describing a new plan, that would not apply.)
Transfers between investment types also affect the ability to take a hardship distribution from elective deferrals. Though the IRS has not clearly addressed the question, the Code and regulations have generally been interpreted such that if employer contributions that are currently in a 403(b)(1) annuity were originally contributed to a 403(b)(7) mutual fund and later transferred to the 403(b)(1) annuity, a hardship distribution from such contributions is NOT permitted, because the original contribution to the 403(b)(7) forever “taints” the money as “attributable to” a 403(b)(7) contribution. Thus, for plans with both types of investments, it is rare to see a hardship distribution for the 403(b)(1) employer contributions, since it would be difficult to recordkeep due to the frequent transfers back and forth between investment types.
Thus, to summarize, your 403(b)(7) plan may permit hardship distributions from elective deferrals, but NOT from employer contributions.
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.