Retirement Plans: IRS Updates to Hardship Distributions

In September 2019, the IRS published a Final Rule in the Federal Register that relaxed several restrictions surrounding employee benefit plan hardship distributions. These new rules, which went into effect Jan. 1, 2020, are as follows:

Removal of Six-Month Contribution Suspension

Under previous regulations, when a hardship distribution was initiated, the participant’s contributions were suspended for the following six-month period. Under the updated regulations, Plan Sponsors are no longer allowed to suspend participant contributions following a hardship distribution.

Changes to Participant Loan Requirements

Under previous regulations, if a retirement plan offered both participant loans as well as hardship distributions, participants were required to first utilize any participant loan before they were able to take a hardship distribution. Under the updated regulations, this requirement has been lifted, allowing participants to take a hardship distribution without first utilizing a participant loan.

Expansion of Funds Available for Withdrawal

Under previous regulations, hardship distributions were limited to the participant contributions, typically pre-tax and Roth deferrals. Under the updated regulations, Plan Sponsors now have the option to expand available funds to include Qualified Matching Contributions (QMACs), Qualified Non-Elective Contributions (QNECs), Safe Harbor Matching Contributions and the earnings that have accumulated on all eligible contribution sources.

Simplified Verification Process

Under previous regulations, the Plan Sponsor was required to account for all relevant facts and circumstances to determine if a hardship distribution was necessary. Under the updated regulations, the verification process for hardship distributions is simplified, allowing employers to rely on employee representations that they have insufficient cash or other liquid assets reasonably available to satisfy a financial need.

Additional Safe Harbor Category

Under previous regulations, there were six Safe Harbor categories for which a hardship distribution could be taken:

  • Medical expenses not covered by health insurance
  • Purchase of principal residence
  • Eviction/foreclosure prevention
  • Tuition costs
  • Funeral expenses
  • Principal residence repairs

Under the updated regulations, a seventh Safe Harbor category, disaster relief, was added.

All employee benefit plans are required to be formally amended to reflect these changes by Dec. 31, 2021. To learn how these updates may impact your retirement plan, contact the experts at SST today.

Thanks to SST Account Supervisor Chris Adams for providing the content of this post. Click here to learn more about Chris.