On Sept.19, 2019, the IRS issued final regulations regarding the hardship distribution requirements for 401(k) plans (T.D. 9875). The regulations are issued pursuant to provisions of the Bipartisan Budget Act of 2018 (“BBA”) that amended the hardship rules. The IRS previously issued substantially similar proposed regulations in Nov. of 2018.
The final regulations: (1) expand the safe harbor list of expenses deemed to be made on account of an immediate and heavy financial need; (2) modify the rule for determining whether a distribution is necessary to satisfy an immediate and heavy financial need; (3) allow beneficiaries to apply for hardship distributions; (4) modify the rules for determining sources available for distribution; and (5) clarify that the new hardship distribution of elective contributions rules generally apply to section 403(b) plans.
The Internal Revenue Code provides that elective contributions to a 401(k) plan may be distributed on or after the occurrence of certain events. This includes a distribution based on the plan participant’s immediate and heavy financial need of the plan participant in an amount necessary to satisfy the financial need of the participant.
Expanded Safe Harbor
The IRS regulations provide a safe harbor rule that provides a list of expenses that are deemed to be made on account of an immediate and heavy financial need. The final regulation now allow for primary beneficiaries under the plan to qualify for incurred hardship expenses. Additionally, the regulations added to the list of safe harbor expenses to include expenses related to certain disasters.
Modification to Immediate and Heavy Financial Need
The final regulations modify the rules for determining whether a distribution is necessary to satisfy an immediate and heavy financial need. Specifically, the final regulations eliminate the six-month prohibition from making contributions after receipt of a hardship distribution and the requirement to take plan loans prior to obtaining a hardship distribution.
Additionally, the regulations eliminate the rule requiring a consideration of all the relevant facts and circumstances when determining whether a distribution is necessary, and now provides for one general standard for determining whether a distribution is necessary. The general standard is set forth below:
1. Hardship distribution may not exceed the amount of an employee’s need (including any amounts necessary to pay any federal, state or income taxes or penalties reasonably anticipated to result from the distribution);
2. The employee must have obtained other available, non-hardship distributions under the employer’s plan, excluding loans but including ESOP dividend distributions ; and
3. The employee must provide a representation that he or she has insufficient cash or other liquid assets available to satisfy the financial need
The plan administrator may rely on the plan participant’s representations, provided that the administrator has no actual knowledge to the contrary.
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Bill O’Malley – Senior Director
Joni Andrioff – Senior Director
Katie Beaver – Associate