In September, the IRS published the final hardship distribution regulations initially outlined two years ago in the Bipartisan Budget Act and the Tax Cuts and Jobs Act. This final version very closely follows the proposed version, so there shouldn’t be many surprises for retirement plan sponsors and committees.
The goal of these changes is to make it easier for participants to access their accounts in the event of a true financial hardship without impeding their ability to continue to save for retirement.
What Are The Key Changes?
- For plan years beginning in 2020, plans are no longer allowed to suspend participant contributions after a hardship distribution is taken. Previously participant deferrals could be suspended for six months.
- Plans no longer need to require that participants obtain all available loans prior to receiving a hardship distribution.
- Plans are not required but may allow participants to receive hardship distributions from all sources of money and earnings in the plan—employee deferrals, traditional safe harbor contributions, QNECs, QMACs, etc. In the past, some sources of money and earnings on contributions were excluded from the amount available for a hardship.
- The standard to determine the necessity of taking a hardship distribution has been simplified to eliminate the subjectivity of the old “facts and circumstances” test. The more objective standards are:
- The hardship distribution cannot exceed the amount, including taxes and penalties that may be incurred from the distribution, of the financial need.
- The participant must take all available distributions, aside from loans, from the plan or any other plan sponsored by the employer.
- The participant does not have sufficient cash or other liquid assets to cover the emergency expense. Plan sponsors can rely on the participant to indicate in writing, or electronically, that this is the case.
- To make funds easier to access when there are losses from natural disasters, hardship distributions are available for expenses resulting from a federally-declared disaster area or in the event of a casualty loss that is tax-deductible. Distributions are available for the latter scenario regardless of whether it occurred in a federally-declared disaster area.
What Do Plan Sponsors Need to Do Now?
Two parts of these rules are mandatory to implement:
- The removal of suspension of deferrals after a hardship distribution
- The updated list of safe harbor expenses
The others, like new sources of money available for hardship distributions, are optional. Retirement committees should make and document decisions on optional components of the rules and work with their recordkeepers and third-party administrators to ensure documents are updated appropriately.
For more information on the final IRS hardship distribution regulations and the implications for your organization’s retirement plan, please reach out to Curi Capital’s Retirement Plan Solutions team at 984-202-2800.