Plan Hardship Distribution Rules Change in 2019 by Alison Cohen
Plan hardship distribution rules will change effective January 1, 2019 – for the better! Just when you finally learn the rules, leave it to the government to make plan hardship distribution rule changes. Earlier this year, the Bipartisan Budget Act of 2018 was passed by Congress and signed into law by the President. This law made several changes that impact retirement plans. One notable revision is to modify how hardship distributions are handled.
Effective January 1, 2019, the following hardship distribution rule changes are being made to the Internal Revenue Code:
- A participant’s 401(k) deferrals will no longer need to be suspended for six months following a hardship withdrawal;
- Participants may take a hardship withdrawal without first requesting a plan loan; and
- The money sources available for a hardship withdrawal have been expanded to include qualified nonelective contributions (“QNEC”), qualified matching contributions (“QMAC”), and earnings on QNEC, QMAC, and employee deferrals (including post-1988 earnings on employee deferrals).
It is important to note that the first two bullets above are included in the requirements for a hardship distribution to meet the safe harbor definition. 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, beneficial regulations. You may want to confer with your plan document provider to determine whether you may need to amend your plan to adopt the safe harbor definition.
There are still some outstanding questions that are awaiting guidance from the IRS. For example, if Bob takes a hardship distribution on December 14, 2018, will he have to have his employee deferrals suspended for six months? Or will Bob only have to have his employee deferrals suspended for two weeks? We don’t know yet. If you sponsor a 403(b) plan, do these changes apply to you? While this may have been Congress’ intent, the law itself does not extend to 403(b) plans. We are all hoping that this will be fixed in a technical corrections bill later this year.
Your action items for 2019:
- Confirm with your document provider whether you use the safe harbor definition for hardship distributions.
- Adopt any necessary amendments when they are provided to you by your document provider prior to the end of the plan year in which you institute these changes.
- Update all internal procedures and materials regarding hardship distributions.
- Determine if your service provider has updated its system for the new regulations so participants can get accurate calculations for hardship availability.
As you can see, the plan hardship distribution rule changes require your thoughtful follow-up. Be sure to contact your retirement plan service providers to discuss how to use these new rules to your best advantage.
Alison Cohen, J.D., C.P.C.,
Alison is a Partner with Ferenczy Benefits Law Center in Atlanta, Georgia. Alison advises clients on many issues related to qualified retirement plans, including design, mergers and acquisitions, audits, and operational issues. Alison commonly works with clients that have operational issues to guide them through the Internal Revenue Service (IRS) and/or Department of Labor (DOL) corrective programs, prepare corrective filings, and prepare and support clients through an audit conducted by the IRS and/or DOL. See full Bio here.