IRS Publishes Final Hardship Rules

On September 23, 2019, the IRS published final regulations that amended the rules relating to hardship withdrawals from 401(k) and other employer-sponsored plans.

The new regulations were derived from proposals made in the Bipartisan Budget Act of 2018 and aim to ease the administrative burden of retirement plan sponsors when administering hardship distributions within their plans. They also relax the requirements for plan participants who are seeking access to their retirement funds when faced with an immediate financial need under certain circumstances.

What Is a Hardship Distribution?
As a reminder, a retirement plan may allow a plan participant to take a distribution of a portion of his or her retirement funds if the funds are withdrawn to satisfy an immediate and heavy financial need and if the amount is necessary for fulfilling that need. Offering a hardship distribution option is not a requirement for a retirement plan, however.

What Changes Now That the Regulations Are Final?

The six-month suspension on new contributions has been eliminated. Under previous rules, a participant who received a hardship distribution was prohibited from contributing to his or her account for six months after the date of the distribution. The new regulation eradicates that prohibition, and participants who receive a hardship distribution may continue to contribute to their account uninterrupted.
The new rules remove the requirement for a participant to first exhaust his or her available plan loan options before requesting a hardship distribution.
It is no longer required to apply all “relevant facts and circumstances” when determining if a hardship distribution is necessary to satisfy a financial need. Instead, a three-prong test will be applied:
1. The amount of the hardship distribution must not exceed the amount of the participant’s need.
2. The participant must have obtained other available nonhardship distributions under the employer’s plans.
3. The participant must provide a representation that he or she has insufficient cash or other liquid assets available to satisfy the financial need.
Under the new rule, the representation (referenced in #3 above) may be made in writing or electronically. It may also be made verbally, provided the verbal representation can be recorded. Although a hardship distribution may not be made if a plan administrator has “actual knowledge that is contrary to the representation,” it is limited to situations in which the plan administrator already possesses enough previous knowledge. (Plan administrators do not have an obligation to inquire specifically about the representation.)
Expanded money sources may now be used for hardship distributions. This change modifies the previous rules, under which hardship distributions could be taken only from elective deferrals. Now, in addition to elective deferrals, qualified nonelective contributions and qualified matching contributions and associated earnings may be tapped for hardship distributions.
The final regulations modify the list of eligible safe harbor expenses. They allow hardship distributions to be taken when needed to pay for disaster-related expenses:
1. Only the affected participant who lives or works in a disaster area can qualify for hardship relief. (Previously, the participant’s relatives and dependents could qualify.)
2. There is no specific deadline for a request for a disaster-related hardship. Prior disaster relief announcements imposed deadlines for requesting hardship distributions.

What Should Plan Sponsors Do?
In terms of applicability dates, the final regulations provide plan sponsors with options. Any amendment to a plan must be completed for hardship distributions no later than January 1, 2020, however. In order to stay on top of the new regulations, retirement plan sponsors hould connect with their recordkeeper or third-party administrator (TPA) to determine the best course of action for amending their plan. In addition, plan sponsors should revisit their internal procedures and the workflows for administering their plan to ensure that they are in harmony with the new hardship rule mandates. As always, plan sponsors are encouraged to seek the counsel of an ERISA attorney, TPA, or other service providers when assessing and implementing changes to their plan’s provisions.

We Can Help
We are ready to provide you with the ideas, guidance, and foresight to position your firm for success. If you would like to review the new retirement plan limits or legislative happenings that may affect your firm’s benefit plan offerings, we’re here to assist you.