IRS Finalizes Hardship Withdrawal Rules

Michael A. Webb, with Cammack Retirement Group, says there are no substantive changes from the proposed regulations, but he points out certain items in the final regulations plan sponsors should note.

The IRS has issued final regulations that amend the rules relating to hardship distributions from 401(k) and other plans. 

The final regulations reflect statutory changes, including changes made by the Bipartisan Budget Act of 2018. The Act called for the Secretary of Treasury to amend regulations to delete the six-month prohibition on contributions to a retirement plan following a hardship withdrawal. The allowance of hardship withdrawals was also extended in the bill to contributions to a profit sharing or stock bonus plan, qualified non-elective contributions (QNECs) and qualified matching contributions (QMACs) and earnings on the contributions now allowed. In addition, the bill said, “A distribution shall not be treated as failing to be made upon the hardship of an employee solely because the employee does not take any available loan under the plan.”

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The IRS proposed regulatory amendments in November 2018. It also has since issued a Snapshot publication explaining the new mechanics of hardship withdrawals.

In a Client Alert from Cammack Retirement Group, Michael A. Webb, vice president, Retirement Plan Services, says for 403(b) plans that have a remedial amendment deadline of March 31, 2020, The Treasury Department and the IRS are considering a later amendment deadline in separate guidance for the amendments relating to the final regulations.

Webb adds that the final regulations contain no substantive changes from the proposed regulations, but considers some issues worthy of note, including:

  • With respect to employee representation of financial hardship beginning in 2020, an employee can make a representation that he or she has insufficient cash or other liquid assets reasonably available to satisfy a financial need, even if the employee does have cash or other liquid assets on hand, provided that those assets are earmarked to pay an obligation in the near future (e.g., rent);
  • Employee representations may be made over the phone, provided that the call is recorded;
  • The IRS retained the requirement from the proposed regulations that the plan administrator may rely on the employee’s representation, unless the plan administrator has actual knowledge of the contrary;
  • It was clarified that plans could require a minimum amount for hardship distributions, provided the minimum is non-discriminatory;
  • Deferred compensation plans, including 457(f) plans, are not subject to the restriction on the suspension of deferrals, so if there is suspension of deferral language in these plans when a hardship distribution is taken from a 401(k) or 403(b) plan, that language can be retained (plan sponsors also have the ability to it eliminate it); and
  • To be considered using the safe harbor standards for hardship distributions, a plan need not allow hardship distributions for all safe harbor expenses or for expenses of all the categories of individuals described in the regulations.
Text of the final regulations is here. They are scheduled to be published in the Federal Register September 23.

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