On February 9, 2018, the Bipartisan Budget Act of 2018 was passed into law, which ended the government shutdown by raising the debt ceiling for the next two years. Sandwiched deep within were changes to rules that govern hardship distributions in 401(k) plans.
Let’s take a step back. What does hardship even mean?
401(k) plans may have the option to elect/offer participant hardship distributions. While plan loans are discretionary with a few limitations (maximum loan amount, repayment period), the IRS has specific requirements for a hardship distribution to meet the safe harbor definition of “immediate and heavy financial need.” Plan sponsors should validate the need and amount for a participant hardship and retain necessary paperwork in case of a random IRS plan audit. Hardship cases typically include:
- Unreimbursed medical expenses for you, your spouse, or dependents.
- Mortgage payment to prevent eviction from your home, or foreclosure on the mortgage (on your primary residence).
- Purchase of employee’s principal residence.
- Certain expenses for the repair of damage to your principal residence.
- College tuition and related education costs such as room and board for next 12 months for you, your spouse, dependents, or children who are no longer dependents.
- Funeral expenses.
Historically, there were withdrawal restrictions on specific money types and a six-month suspension for contributing into the plan. But times are changing. Effective January 1, 2019, several modifications to hardship withdrawal rules will take place. The legislation will:
- Allow distributions from previously ineligible money types including qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), earnings on elective deferral contributions, QNECs and QMACs.
- Eliminate the six-month suspension rule following a hardship.
- Disregard requirement of taking plan loan prior to a hardship (if available in plan).
None of these changes impact the rules for unforeseeable emergency withdrawals from 457(b) plans.
This significant change will help participants who may not have any other financial resources available in case of an emergency. It is important for plan sponsors to note they must eliminate the requirement to suspend elective deferrals for six months following a hardship distribution taken after January 1, 2020. However, this change may be adopted as early as January 1, 2019. Plan sponsors can determine what is best for their plan and their participants. As I have said before (maybe even more than once), all plans are not created equal.
If you have any questions about 401(k) plan design or hardship provisions, ACG is always here for you.