IRS Finalizes Changes in Hardship Distribution Rules

On September 23, 2019, the IRS published final regulations amending the rules governing hardship distributions from 401(k) plans pursuant to changes contained in the Bipartisan Budget  Act of 2018. Highlights include:

- Disaster-Related Hardships: The preamble confirms that the new safe harbor for expenses and losses incurred on account of a federally declared disaster differs from previous disaster-specific relief. The safe harbor applies only to expenses and losses of an employee whose principal residence or place of employment was within the area designated for individual relief; it does not apply to losses of relatives and dependents. Furthermore, the safe harbor sets no deadline for requesting a distribution, and it does not expressly authorize relaxing procedural requirements. Finally, there is no extended deadline for adopting disaster-related hardship provisions if they are not adopted as part of a plan amendment reflecting the final regulations. The IRS expects that the new safe harbor will make relief announcements for future disasters unnecessary, but it is considering extending the amendment deadline for plans that postpone adding the new safe harbor until a particular disaster. (That extension might also apply to new plan loan provisions added in response to a disaster.)

- Funds Available: The preamble affirms that the funds available for hardship distributions are elective contributions and safe harbor contributions including earnings under Code §§ 401(k)(12) and (13). However, plans may choose to limit the contributions and earnings that are available for hardship distributions.

- Participant Representation:  The final regulations establish one general standard for determining that a distribution is necessary to satisfy a participant’s financial need. Under the final regulations, however, participants must represent that they have insufficient cash or other liquid assets “reasonably available” to satisfy the need, a standard that could be met even if the participant has funds that will soon be needed for another purpose (e.g., rent). The regulations also clarify that a participant’s telephonic representation is acceptable. 

- Suspensions: The final regulations have been revised to eliminate the suspension period that barred participants who take a hardship distribution from making new contributions to the plan for six months. Starting Jan. 1, 2020, plans will no longer be able to suspend contributions following a hardship distribution.
- Applicability Dates: While the final regulations apply to distributions made on or after January 1, 2020, they may be applied to distributions currently, and suspensions of contributions may be eliminated. If the final regulations are applied to distributions before 2020, the requirements relating to employee representations and the prohibition of suspensions may be disregarded as to the pre-2020 distributions.

- Plan Amendments: According to the preamble, all of a plan’s amendments relating to the final regulations—i.e., required amendments and integrally related amendments effective no later than the required amendment—will have the same amendment deadline as determined by Rev. Proc. 2016-37. For example, if the required amendments are included in the required amendments list for 2019, the deadline for required amendments and all integrally related amendments (including those with an earlier effective date) for an individually designed, nongovernmental plan will be December 31, 2021. Employers using preapproved plans have until the deadline for their interim amendments required by the final regulations to adopt interim amendments integrally related to the final regulations. Thus, a preapproved plan that implemented the prohibition on suspensions in 2020 could use the required amendment deadline (the tax-filing deadline plus extensions for 2020) as the deadline for an interim amendment that added new safe harbor expenses (which the plan could have implemented as early as 2018).

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Lifetime Benefit Solutions, Inc. is not a law firm, has not reviewed that information for legal sufficiency, and does not give legal or tax advice. The sponsoring employer should have this information reviewed by its own legal counsel for compliance with ERISA, tax requirements, and other applicable laws and regulations.


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