Adopted as Proposed: IRS Finalizes 401k Hardship Distribution Regulations

401k hardship distributions, IRS Final Regulations

The IRS's finalized hardship distribution regulations benefit 401k participants who experience “an immediate and heavy financial need."

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:

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:

The plan may also permit distributions for medical care, tuition, and funeral expenses for certain beneficiaries of the participant.

Other notable changes

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