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Hardship Distribution Regulations Issued

MaryPat Davitz

November 19, 2019

In September, the IRS and the Treasury Department issued final regulations that make a number of significant changes to the rules that apply to hardship distributions from 401(k) and 403(b) retirement plans. These regulations respond to public comments that were made regarding earlier proposed regulations.

Following is a summary of the most important aspects of the final regulations for employee benefit plan sponsors.

Six-month contribution suspension has been eliminated. 401(k) and 401(b) plans can no longer impose a six-month suspension of contributions following hardship withdrawals. This provision is effective for hardship distributions that occur on or after January 1, 2020.

Plan loan requirement is eliminated. Employees are no longer required to take out a plan loan before receiving a hardship distribution. This provision is effective for hardship distributions that occur on or after January 1, 2019.

“Facts and circumstances” analysis is eliminated. An analysis to determine whether a hardship distribution is necessary to satisfy a financial need is no longer required. Instead, a general standard that relies on three objective prongs should be used.

Safe harbor events have changed. The types of distributions that are considered to be made due to an immediate and heavy financial need have been changed. The casualty loss definition has been revised, and a new FEMA disaster category has been added to reflect these changes. This revised list can be applied to hardship distributions that were made as far back as January 1, 2018.

Hardship distribution sources are expanded. The sources available for hardship distributions are expanded for both 401(k) and 403(b) plans. They now include earnings on elective deferrals, Qualified Non-Elective Employer Contributions (QNECs), and Qualified Matching Contributions (QMACs). For 403(b) plans, earnings on QNECs and QMACs are only eligible for hardship distributions if they are not held in a custodial account.  

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