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IRS Issues Anticipated 401(k) Plan Hardship Withdrawal Guidance

12.18.2018

Plan sponsors and administrators have been eagerly awaiting IRS guidance on changes to the hardship withdrawal distribution rules made by the Bipartisan Budget Act of 2018 (the "Act"), which are effective for plan years beginning on or after January 1, 2019. These changes impact 401(k) plans that offer hardship distribution withdrawals, which provide active participants the ability to receive their elective deferrals prior to reaching age 59 ½. The proposed regulations were issued as a result of the conflict between the current hardship withdrawal distribution rules and the Act.

The proposed regulations generally address: (1) the requirement elimination of the post-withdrawal suspension of elective deferrals; (2) the optional elimination of the requirement for participants to take plan loans first; and (3) the ability to include additional plan account sources in hardship distributions.

Although the Act’s hardship withdrawal distribution provisions are effective January 1, 2019 for calendar years plans, the proposed regulations do not mandate any operational changes for the 2019 calendar year. Beginning January 1, 2020, following the likely issuance of final regulations, however, certain changes will be required. The following is a synopsis of the required changes and action items.

Current 401(k) Plan Hardship Withdrawal Rules

The following are the current rules that apply with respect to permitting a participant to seek and receive a hardship withdrawal distribution from the 401(k) plan: (1) the hardship withdrawal distribution request must be on account of an immediate and heavy financial need (this includes (a) unreimbursed medical expenses, (b) purchase of principal residence, (c) post-secondary school tuition, (d) to avoid eviction or foreclosure, (e) repair damage to a principal residence as a casualty loss, or (f) funeral expenses); (2) the hardship withdrawal request must be necessary to satisfy a financial need (this requires that the need be deemed necessary and that all alternative means have been exhausted, including utilization of any 401(k) plan loan options); and (3) only hardship withdrawal distributions are available from elective deferrals and not from employer contributions.

Proposed Rules for 401(k) Plan Hardship Withdrawal Rules

The proposed regulations make a number of changes to the hardship withdrawal distribution provisions as follows: (1) elimination of the 6-month elective deferral suspension (optional for 2019 plan year, mandatory for 2020 plan year); (2) elimination of the requirement to utilize 401(k) plan loans first (optional for 2019 plan year, mandatory for 2020 plan year); and (3) expansion of the accounts eligible for hardship withdrawal distributions (the proposed regulations permit a 401(k) plan now to allow for hardship withdrawal distributions to come from employer contributions as well as participant contributions).

Action Steps

As we near closer to 2019 and the beginning of the implementation of the hardship withdrawal proposed regulations, plan sponsors will want to (1) promptly review their hardship distribution procedures in light of the proposed regulations; (2) determine which changes will be implemented and as of what date; and (3) make arrangements to ensure proper the proper amendment is put in place for the 401(k) plan. Do not hesitate to contact Koley Jessen to discuss any of these upcoming hardship withdrawal distribution changes to your 401(k) plan.

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