401k participants who experience “an immediate and heavy financial need” will be allowed to access funds from their 401k (and 403b) plans without penalty under new finalized hardship regulations released by the Internal Revenue Service (IRS) on Sept. 19.
The finalized hardship regulations, which relax some of the rules previously applicable to hardship withdrawals, contain no significant differences from the proposed regulations released on Nov. 9, 2018, and take effect as of being published in the Federal Register on Sept. 23.
Per a previously released IRS “Issue Snapshot—Hardship Distribution Rules from 401k Plans,” which explained several changes made to the requirements for hardship distributions from 401k plans as a result of the Bipartisan Budget Act of 2018, a hardship distribution from a participant’s account can only be made if the distribution is:
- because of an immediate and heavy financial need,
- limited to the amount necessaryto satisfy that financial need, and
- limited to the participant’s total elective deferrals as of the date of distribution, reduced by the amount of previous distributions of elective deferrals.
The IRS says determination of both the existence of an immediate and heavy financial need and of the amount necessary to meet this need must be made in accordance with nondiscriminatory and objective standards under the plan. Plans can require a minimum amount for hardship distributions, provided the minimum is non-discriminatory.
Determination of existence of need
Whether an employee has an immediate and heavy financial need depends on all relevant facts and circumstances. However, many plans include “safe harbor” provisions to determine if the distribution is on account of a participant’s hardship, the IRS guidance says. A distribution is deemed to be on account of an immediate and heavy financial need of the employee if the distribution is for:
- Generally, expenses for medical care previously incurred by the employee, the employee’s spouse, or any dependents of the employee or necessary for these persons to obtain medical care;
- Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments);
- Payment of tuition, related educational fees, and room and board expenses, for up to the next 12 months of postsecondary education for the employee, or the employee’s spouse, children, or dependents;
- Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence;
- Burial or funeral expenses for the employee’s deceased parent, spouse, children, or dependents; or
- Certain expenses relating to the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under IRC § 165.
The plan may also permit distributions for medical care, tuition, and funeral expenses for certain beneficiaries of the participant.
Other notable changes
- The elimination of the requirement that a participant’s contributions be suspended for at least six months following the receipt of a hardship distribution and the prohibition against such suspensions for hardships distribution made on or after Jan. 1, 2020.
- The elimination of the requirement that a participant take all available loans before receiving a hardship distribution, but it may be retained at the election of the plan sponsor.
- An expansion of the sources from which a 401k plan can permit hardship distributions, including qualified non-elective contributions (QNECs), qualified matching contributions (QMACs), employer safe harbor contributions, earnings thereon and earnings on deferral contributions.
- A new safe harbor withdrawal expense has been added relating to expenses incurred as a result of certain disasters in federally declared disaster areas in which an employee’s principal residence or place of employment is located, retroactive to Jan. 1, 2018.
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Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
