On September 19, 2019, the IRS issued final regulations updating the rules for hardship distributions from 401(k) plans and certain other qualified plans. The final regulations largely reflect changes made by the Tax Cuts and Jobs Act and the Bipartisan Budget Act of 2018. The final regulations are very similar to the IRS proposed regulations issued in late 2018.
The following is an outline of the key changes set forth in the final regulations.
Elimination of 6-Month Suspension
- Effective January 1, 2020, plans may no longer impose a six-month suspension on participants who take hardship distributions.
- Instead of the six-month suspension requirement, effective January 1, 2020, plans must require a participant to sign (or electronically execute) a statement certifying that the participant has no other cash or liquid assets reasonably available from which the participant can satisfy the hardship. The plan Administrator may rely on this certification unless the Plan Administrator knows the statement is inaccurate.
- While elimination of the 6-month suspension is not required until January 1, 2020, plan sponsors may elect to eliminate the suspension as early as January 1, 2019. Note that suspensions may be eliminated during 2019 without the participant certification requirement.
- During 2019, plan sponsors may remove any hardship suspensions previously in the plan.
Loan Requirement Before Hardship Distributions Permitted But Not Required
- The final regulations provide that a plan may require a participant to take all available loans before a hardship withdrawal, but the loan requirement is no longer mandatory.
- The participant is still required to take all other withdrawals and distributions currently available from all other qualified and nonqualified plans before the hardship distribution may be approved.
- The requirement that participants withdraw any available employee stock ownership plan (“ESOP”) dividends before taking a hardship distribution still remains, but only “currently available” ESOP dividends must be withdrawn. An ESOP dividend is “currently available” if, at the time the participant submits a hardship distribution request, the dividend: (i) has been paid to the plan; and (ii) is available for the employee to elect in cash. Accordingly, if a plan requires a participant to elect to receive ESOP dividends before the dividend payment date, such dividends will not be deemed currently available.
Amounts Eligible for Withdrawal
- The final regulations expand the rules so that plans may allow hardship distributions from all earnings on elective contributions.
- Plans may also permit hardship distributions from safe harbor contributions, qualified nonelective contributions (“QNECs”) and qualified matching contributions (“QMACs”).
Hardship Distributions for Damage to Principal Residence
- The Tax Cuts and Jobs Act limited the casualty loss deduction to losses attributable to a federally declared disaster.
- The final regulations state that for hardship distributions made on or after January 1, 2018, for distributions related to damage to a principal residence that would qualify for a casualty loss deduction, the restriction that the loss be attributable to a federally declared disaster does not apply.
Safe Harbor Hardship Expenses
- The final regulations expand the list of safe harbor hardship expenses to the following — any expenses or losses (including lost income) incurred due to a federally declared disaster if the employee’s principal residence or principal place of employment is in an area designated by the Federal Emergency Management Agency (“FEMA”) as eligible for individual assistance.
- Note that the regulations are limited to expenses and losses of the participant, not the participant’s relatives or dependents.
- Additionally, the regulations do not include the relaxed hardship documentation requirements that have typically accompanied the IRS’s federally declared disaster relief. However, plan administrators do have some discretion regarding the documentation requirements following a natural disaster.
Timing and Form of Changes
Many of the revisions addressed in the final regulations are optional for plan administrators. However, plans must remove the six-month suspension and start requiring the replacement participant certification no later than January 1, 2020. This deadline applies even if the plan year does not coincide with the calendar year.
Plan Amendment Deadline
While operational changes are required earlier, in general, individually designed plans are not required to be amended to comply with the final regulations until December 31, 2021. (A later deadline may apply if the plan is not a calendar year plan or if the IRS delays the inclusion of these regulations in its annual Required Amendment List.)
Sponsors that have adopted pre-approved plans may have a slightly earlier amendment deadline, but it will be no earlier than the latest date for the sponsor to file its corporate tax return for its 2020 tax year.
Many plan sponsors have already implemented certain plan changes based on the statutory provisions and the proposed regulations. Action may need to be taken through both written plan amendment and operational changes.
Plan sponsors should consult with legal counsel to review their 401(k) and 403(b) plans and related policies, as applicable, to determine what plan and/or policy revisions are required and/or recommended based on the issuance of the final regulations.
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This article is provided by Fraser Stryker for general informational purposes and is not intended to be and should not be construed as legal advice on any specific facts or circumstances.