Earlier this year, the Bipartisan Budget Act of 2018 was passed by Congress and signed into law. While this law made several changes that impact retirement plans, one provision changing the rules around hardship distributions is particularly notable. As a result of the act, changes to the hardship distribution rules for 401(k) plans will take effect for the 2019 plan year (e.g., as of January 1, 2019, for calendar year plans). There are three primary changes to the current hardship distribution rules:
- Participants will no longer be required to take available plan loans before a hardship distribution is granted.
- When a hardship is taken, it is no longer necessary to suspend employee salary deferrals for six months following the withdrawal.
- The plan will allow for the distribution of other types of contributions beyond employee salary deferrals and pre-1989 earnings as part of a hardship distribution, including qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), safe harbor contributions, and earnings from all eligible sources (including post 1988 earnings on elective deferrals).
The first and second changes are currently part of the IRS’s requirements for a hardship distribution to meet the safe harbor definition of “necessary to satisfy an immediate and heavy financial need.” If your plan currently uses anything other than the safe harbor definition for hardship distributions, your plan participants may not take advantage of these new regulations. To adopt these new hardship rules, you’ll need to ensure that:
- You confirm with your document provider whether you use the safe harbor definition for hardship distributions.
- Your hardship distribution procedures are updated to reflect the changes.
- All necessary administrative changes are being implemented by the plan record keepers.
- You address the language of your plan document for any necessary amendments.
What if you sponsor a 403(b) plan? While the Treasury regulations for a hardship withdrawal under 401(k) and 403(b) regulations have the same meaning, further clarification concerning the latter is still needed from the IRS. While applying the new hardship rules to both types may have been Congress’ intent, the law itself does not currently extend to 403(b) plans. Many are hoping for a technical correction bill to address 403(b) plans and issues such as salary deferral suspension for hardships late in the year. The Treasury Secretary still has until early 2019 to modify the current 401(k) regulations to reflect the new hardship distribution rules.
Come 2019, a general certainty is plan sponsors may incorporate softer hardship distribution rules into their plans, policies, and procedures due to changes made under the Bipartisan Budget Act of 2018.
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