Record Keepers Respond to Hardship Withdrawal Changes

November 13, 2018

Sponsors of 401(k) and 403(b) plans should be aware that the rules that apply to hardship withdrawals are changing. Early this year, the Bipartisan Budget Act (the “BBA”) made certain changes to the law governing hardship withdrawals and directed the Secretary of the Treasury to amend the current hardship withdrawal regulations under the Internal Revenue Code (the “Code”). (For more information on the BBA’s hardship withdrawal provisions, see our previous Client Alert.) In response to the BBA, record keepers have been creating default hardship withdrawal provisions that will apply to their clients’ plans unless their clients opt out. Then, on Friday, November 9, 2018, the IRS released proposed amendments to the regulations applicable to hardship withdrawals (the “Proposed Regulations”). The Proposed Regulations will begin to apply to hardship withdrawals taken in plan years beginning in 2019.

The Proposed Regulations

In response to the Proposed Regulations, record keepers likely will be reaching out to their clients again in the coming weeks and months with additional changes to their default hardship withdrawal provisions for the 2019 plan year (and beyond). It is important that plan sponsors understand these communications from their record keepers in light of the new hardship withdrawal rules. Below is a summary of some of the changes included in the Proposed Regulations that record keepers will likely be touching on in the near future.

  • Six Month Contribution Suspension Not Permitted Beginning in 2020: The Proposed Regulations would prohibit plans from requiring participants to suspend contributions as a condition of taking hardship withdrawals on or after January 1, 2020. This means that any 401(k) or 403(b) plan document must be amended if it expressly requires the suspension of employee contributions for six months following a hardship withdrawal (the current rule).
  • New Sources Available for Hardship Withdrawals: The Proposed Regulations would revise the current regulations to allow hardship withdrawals under 401(k) plans to be taken from qualified non elective contributions (“QNECs”), qualified matching contributions (“QMACs”), safe harbor contributions, and earnings. 403(b) plans may not allow distributions of earnings on elective deferrals to be made as part of a hardship withdrawal, and QNECs and QMACs are only available for hardship withdrawal if such QNECs or QMACs are not held in a mutual fund. Plan sponsors may still limit the sources available for hardship withdrawals.
  • Distributions for Federally Declared Disasters: Under the Proposed Regulations, a hardship withdrawal could be made on account of expenses and losses incurred by an employee who lives in a federally declared disaster area.
  • Employee Representation Required Beginning in 2020: Also effective January 1, 2020, the Proposed Regulations would require employees to represent that they have insufficient cash or other liquid assets to satisfy the need for any distribution. Most plans and record keepers already do this on some level – the Proposed Regulations would formally require this.

Next Steps

Most record keepers are setting operational defaults effective January 1, 2019 that will apply at least some of these new hardship withdrawal rules, such as removing the six-month suspension on contributions and allowing earnings to be distributed in hardship withdrawals. Employers should review these default changes and determine whether the proposed defaults are appropriate for their plans, particularly in light of the Proposed Regulations. If the Proposed Regulations are finalized without changes, then most 401(k) and 403(b) plans offering hardship withdrawals will require an amendment.
Finally, employers sponsoring safe harbor 401(k) plans (including automatic enrollment safe harbor plans) should carefully review their safe harbor notices that are being sent before the 2019 plan year to verify their notices accurately reflect how their plans’ hardship withdrawals will be administered in the 2019 plan year.

Additional Information

If you have any questions regarding the Proposed Regulations or if you would like assistance reviewing information provided by your service providers regarding these new hardship withdrawal rules, please contact a member of our Employee Benefits Practice Group listed in the right-hand column of this page.