2019 Hardship Distribution Rules Are Changing
Occasionally an employee may experience a serious financial need. With no other help available, raiding a retirement plan may be the only option. Prior to 2019, employees and employers alike may have faced hurdles when wrestling with a hardship distribution. Due to new laws, however, hardship distribution rules are changing in 2019.
Bipartisan Budget Act of 2018
On February 9, 2018, President Trump signed the Bipartisan Budget Act of 2018 (“BBA”) into law. BBA included provisions related to the tax provisions, energy tax credits, domestic and military spending, disaster relief, and community health care. This article focuses on the BBA’s effect on retirement plans, specifically hardship distributions.
For Plan Years beginning on or after January 1, 2019, the following provides a summary of some, but not all, of the changes to hardship distributions from 401(k) plans:
- Removed two requirements from hardship standards:
- That elective deferrals are to be suspended for six (6) months after the distribution is made (optional for the 2019 plan year; required beginning January 1, 2020); and
- That the participant first take a loan from the plan, if that option is available (optional for plan years beginning January 1, 2019).
- Expanded funds available to participants for distribution:
- Distributions may include investment earnings on elective deferrals (optional beginning with the 2019 plan year); and
- Distributions may be made from safe harbor contributions and qualified nonelective contributions if the plan sponsor elected this option (optional for plan years beginning January 1, 2019).
Internal Revenue Service Proposed Guidelines
On November 14, 2018, the IRS issued proposed regulations on the hardship changes (the “Proposed Regulations”) and clarified whether such changes were required or optional (as noted in the parentheticals above). Additionally, the Proposed Regulations require changes in the administrative process required to document that a participant has demonstrated the requisite financial need for a hardship distribution (this requirement is optional for 2019 and mandatory beginning January 1, 2020), including:
- Financial hardship distributions cannot exceed the amount needed to alleviate the financial hardship, as adjusted for any taxes or penalties.
- The participant requesting the distribution must have taken all other remedies under the employer’s plan, except taking out a loan.
- The participant must lack cash or liquid assets to cover his or her serious financial need.
- The plan administrator or sponsor may rely on the participant’s representation of financial need unless evidence or “actual knowledge” exists to prove otherwise.
Learn More About Your Retirement Plan Hardship Distributions
Please note that the new rules are intended only for plans that allow financial hardship distributions. If your plan does not offer this benefit, it’s unlikely the new law will affect it.
As sometimes happens, there may be exceptions to hardship distribution rules. As an employer or plan sponsor, it’s critical that you know and understand how the law applies to such distributions.
Anne Tyler Hall is the founding attorney and Principal at Hall Benefits Law, a boutique ERISA and Employee Benefits law firm in Atlanta, GA. Hall Benefits Law serves clients in 25 states and was recognized by the Law Firm 500 in 2018 as the fastest growing ERISA law firm in the country.