Time to Review Your Plan’s Hardship Distributions: Understanding 2020 Hardship Changes

The Bipartisan Budget Act of 2018 (“BBA”) included several changes to retirement plans, specifically changes to 401(k) and 403(b) plan hardship distributions. In response to the BBA, the IRS released proposed new regulations giving benefit plan administrators guidance on how they are likely to view hardship distributions in light of the new law.

Regulatory Changes for Hardship Distributions as of January 1, 2019

The BBA detailed changes that would impact hardship distributions starting in the beginning of 2019. The Act directed new regulations that eliminated the requirement for elective deferrals to be suspended for six months after a hardship distribution. Further, the Act freed up other types of contributions for hardship distributions such as qualified nonelective contributions, qualified matching contributions, earnings on each of these types of contributions, safe harbor contributions, and the earnings on 401(k) deferrals.

Finally, the Act eliminated the requirement that participants take out a plan loan before they are able to receive a hardship distribution, freeing up participant funds without first requiring them to take a step they may not want to take.

On September 19, the IRS released final hardship regulations that were previously issued in proposed form on November 9, 2018. The final regulations contained substantive changes to the previously issued proposed regulations. The following provides an overview of some of the changes set forth in the proposed regulations that were retained in the final regulations and become effective beginning in 2020.

  • Deductions for Casualty Loss: Deductions of this type were previously only allowed for a federally-declared disaster and would satisfy the “immediate and heavy financial need” requirement for a hardship distribution. The proposed rules suggest that a federally-declared disaster is no longer necessary to satisfy IRS Code Section 165, as mentioned in the next bullet point, but would be needed for other tax purposes.
  • “FEMA-Declared Disaster:” Another reason was added to satisfy the “immediate and heavy financial need” requirement for hardship distributions. This reason is available retroactively to the first of 2018 if plan documents are amended accordingly.
  • “Immediate and Heavy Financial Need:” The criteria to determine this were modified such that the hardship cannot exceed the financial need, a loan is no longer required before taking a hardship distribution, and the employer is allowed to rely on the employee’s representation of the need and the employee’s representation that there are no other liquid assets available to satisfy the need. However, the employer must still substantiate the reason for the hardship – for example, review any bills and verify the need exists.
  • Additional Types of Funds Available: New regulations will allow QNECs, QMACs, and associated earnings on these types of contributions, as well as earnings on 403(b) deferrals, to be available for hardship distributions in certain situations.
  • Deferral Suspensions: Starting January 1, 2020, no suspensions can be imposed on accounts due to hardship distributions.

For plans, this means modifying plan documents and working with plan participants retroactively on hardship distributions to allow them to take advantage of these changes.

As with all rule changes regarding benefits plans, the attorneys at Hall Benefits Law will be paying close attention. These changes may mean that plan sponsors want to consider offering hardship distributions where they didn’t previously or make changes to plan documents to allow participants to take advantage of some of the retroactive provisions. To learn more, call our experienced, responsive team today at 678-439-6236 or visit the Hall Benefits Law website.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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