Changes to hardship distribution rules

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

On November 14, 2018, the Internal Revenue Service (IRS) released proposed regulations that will essentially relax certain hardship distribution rules. Though the effective date of these provisions was January 1, 2019, changes were not required during 2018 or 2019. Once the final regulations are issued, certain changes are required, effective January 1, 2020. Below, we discuss some of the most relevant changes:

Don’t miss: Required minimum distribution

  1. Effective January 1, 2019, the plan administrator has the option to include or exclude the requirement that the employee must first obtain a plan loan prior to requesting a hardship distribution.
  2. Previously, hardship distributions were limited to the employee’s elective deferrals and did not include income. As of January 1, 2019, plan administrators are permitted to make changes to allow hardship distributions of elective deferrals, QNECS, QMACS, and safe harbor contributions and earnings on these amounts.
  3. In the past, when a participant took a hardship distribution, plan administrators were required to suspend deferrals for 6 months. Effective January 1, 2019, this is optional. The six-month suspension from making elective contributions will no longer be allowed effective January 1, 2020.

It is important to remember that the plan sponsor has the ultimate responsibility for hardship distributions. Plan sponsors and administrators should be proactive in making sure that their plan documents have been updated accordingly based on the new regulations. For example, the plan document will still need to be modified, effective January 1, 2020, if the plan previously suspended deferrals after hardship and now they are no longer allowed to do so. If assistance or guidance on implementing these changes is needed, do not hesitate to reach out to one of our employee benefit plan audit professionals.

For more on what a hardship distribution is, head over to this article explaining how it affects your 401(k).

If you have any questions on the above, or about how to better navigate your 401(k) in general, please don’t hesitate to contact a Henry+Horne professional.

Courtnee Greshner, CPA