401k Hardship Withdrawals May Be Less of a Hardship

401k, retirement, hardship withdrawal

Are you in the know?

Hardship withdrawals from 401k plans and 403b plans may be more accessible to some plan participants due to proposed regulations issued by the Treasury Department recently that incorporate provisions of the Bipartisan Budget Act of 2018 (BBA), the Tax Cuts and Jobs Act of 2017 (TCJA) and the Pension Protection Act of 2006 (PPA).

These changes relax some of the rules currently applicable to hardship withdrawals.

What Changed?

Safe Harbor Hardship Withdrawal Provisions

401k plans and 403b plans may permit a participant to take a hardship withdrawal to satisfy an immediate and heavy financial need. Certain “safe harbor” requirements for hardship withdrawals are often included in plans to ensure that the withdrawal is due to hardship.

Six “safe harbor” withdrawal expenses are deemed to be made on account of an immediate and heavy financial need.

The recent proposed regulations modify these particular safe harbor withdrawal expenses:

The proposed regulations also modify the rules that apply for determining whether a “safe harbor” withdrawal is necessary to satisfy an immediate and heavy financial need.

Additional Changes

What Should Plan Sponsors Do?

A plan sponsor should consider the following best practices for implementing the required and desired changes to the hardship withdrawal provisions in its plan:

Lori L. Shannon is a partner in Barnes & Thornburg’s Chicago office and a member of the Corporate Department. Shannon focuses her practice on employee benefit and executive compensation matters.

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