The IRS Updated 401(k) Hardship Regulations

by Ashley N. Trotto, Esq.

The Internal Revenue Service and Treasury Department have published final regulations on 401(k) hardship distributions. Following a ten-month vetting process, the proposed regulations—published November 14, 2018—were lightly modified before publication on September 23, 2019.

The substantive changes to the hardship distribution rules can be summarized as follows:

The previously required six-month suspension on plan contributions following a participant’s receipt of a hardship distribution has been eliminated.

The cumbersome facts and circumstances test for determining whether a requested hardship distribution is necessary to satisfy an immediate and heavy financial need was replaced with the following generally applicable 3-prong standard:

1. The employee has obtained all other currently available distributions from plans maintained by the employer;
2. The employee has represented that they have insufficient cash or other liquid assets reasonably available to satisfy the need; and
3. The plan administrator does not have actual knowledge that is contrary to the employee’s representation.

Hardship distributions are now permitted from elective contributions, QNECs, QMACs, and earnings on those amounts, regardless of when contributed or earned.

The previous requirement that Participants must take any available plan loans prior to requesting a hardship distribution has been eliminated.

The safe harbor list of expenses for which distributions are deemed to be made on account of an immediate and heavy financial need was amended to:

1. Add the primary beneficiary under the plan as an individual for whom qualifying medical, education, and funeral expenses may be incurred;
2. Clarify that expenses for the repair of damage to the employee’s principal residence that would qualify for a casualty deduction is not limited by Code §165(h)(5) (restricting the casualty deduction to Federally declared disasters); and
3. Add a new type of expense to the list, relating to expenses (including loss of income) incurred as a result of certain FEMA-declared disasters.

There are many nuances in the final regulations, including effective dates and amendment deadlines, that are not covered in this summary. Please note: the final regulations also affect hardship distributions from 403(b) plans. Call us at (865) 546-7311 with any questions you may have or to request our assistance with the adoption of a plan-specific amendment.