The IRS has proposed new regulations on hardship distributions for participants who need to take money from their retirement savings. The new regulations will generally provide greater leeway for participants who want access to more of their retirement savings. These changes will go into effect for plan years beginning after December 31, 2018.
Current Hardship Distribution Rules
Hardship distributions allow retirement plan participants to take money out of their retirement account because of a financial emergency. Under the current rules, hardship loans can only be made if the distribution is made:
- Due to an immediate and heavy financial need; and
- Limited to the amount necessary to satisfy the financial need.
Proposed Hardship Distribution Rules
Changes under the Bipartisan Budget Act of 2018 have lead to proposed amendments for hardship distributions from 401(k) retirement plans. The primary changes broaden the requirements for under which hardship distributions can be made. This includes:
- Including “primary beneficiary under the plan” as a qualifying individual. Under the prior rule, only dependents or spouses were considered individuals for whom qualifying medical, educational, and funeral expenses may be incurred.
- Modifying the rules for determining what is considered an immediate and heavy financial need, to include expenses incurred as a result of certain disasters (such as Hurricane Maria or California wildfires).
- Modifying the rules for determining whether a distribution is necessary to satisfy an immediate and heavy financial need by eliminating the requirement that an employee is prohibited from making contributions after receipt of a hardship distribution and the requirement to take plan loans before obtaining a hardship distribution.
Clarifying Whether a Distribution is Necessary
The proposed regulations would also modify the standard for determining whether a distribution is necessary. The new standard would be:
- A hardship distribution may not exceed the amount of an employee's need;
- The employee must have obtained other available distributions under the employer's plans; and
- The employee must represent that he or she has insufficient cash or other liquid assets to satisfy the financial need.
Based on this standard, “a plan administrator may rely on the employee's representation unless the administrator has actual knowledge to the contrary.”
Additional Sources for Hardship Distribution
Hardship distributions are not limited to 401(k)s. Under the proposed regulations, hardship distributions could be made from elective 401(k) contributions, QNECs, QMACs, and any earnings on these amounts, regardless of when the earnings or contributions occurred.
Plan Sponsors Are Still Liable For Any Problems
Hardship distributions can cause trouble for plan providers and plan participants. The responsibility for hardship loans falls on the plan provider. Even if the plan provider is using a third-party administrator (TPA) to manage benefit plans, the provider is still liable for any problems.
San Diego Retirement Benefit Lawyers
If you have any questions about upcoming IRS hardship distribution changes or hardship distribution tracking, the law firm of Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm with a focus on employee benefits law. Contact our office today with any questions on how we can help you and your company succeed.