Budget Act Expands Availability of 401(k) Hardship Distributions
The Bipartisan Budget Act enacted on February 9, 2018, provided legislation that eases hardship withdrawals from employer sponsored 401k and 403(b) retirement plans for plan years beginning after December 31, 2018.
Under current rules, participants must request all available plan loans prior to taking a hardship distribution and are prohibited from making new contributions for six months after making the withdrawal. Also, under current rules some specific fund sources are prohibited from taking a hardship distribution.
An overview of the upcoming changes from the Budget Act include:
Elimination of six-month suspension after receiving a hardship distribution
The Budget Act eliminated the six-month suspension on contributions, allowing employees to contribute and collect any employer matching contributions. This change would allow them to continue to save for retirement despite their financial setback.
Permission to extend hardship distributions to amounts that were previously not allowed
The changes effective after December 31, 2018, will also allow hardship withdrawals from the following sources:
- safe harbor plan contributions
- post 12/31/1988 earnings, including those on pre-tax contributions
- qualified non-elective contributions (QNECs)
- qualified matching contributions (QMACs)
Removes the requirement to take available loans or other distributions before a hardship withdrawal
Participants will no longer be required to first take a loan or other form of distribution from their plan account before requesting a hardship withdrawal. Although they will still incur an early withdrawal penalty and pay taxes on the withdrawal, participants will gain access to funds in their hardship without accruing interest and a payback requirement.
Currently, the IRS has not issued any guidance on the application and operation of these policies. To implement these changes, it is likely that a plan document amendment as well as a Summary of Material Modifications or updated Summary Plan Description will be required. We anticipate that these amendments will need to be adopted by the end of the plan's 2019 year. Ultimately, it will be important for you to understand the changes, stay up-to-date with IRS guidance, and evaluate if you would like to offer these hardship opportunities to your participants. Please consider the following questions:
- Do you still want to subject participants to 6-month waiting period following a hardship withdrawal?
- Do you want participants to exhaust all loan options before taking a hardship withdrawal?
- Do you want to allow hardship withdrawals from QNEC and QMAC contributions?
To ensure that changes are handled appropriately, we will need to coordinate with the plan’s recordkeeper and communicate changes to participants.