October 22, 2019

Hardship Distributions from 401(k), 403(b) Plans Need Changes

The U.S. Department of Treasury issued final hardship regulations on September 23, 2019. The final regulations largely adopt previously issued proposed regulations. Now that the treasury has finalized its regulations, companies that sponsor qualified retirement plans allowing for hardship distributions will need to update their plan documents to include the new hardship language.

Changes made by the final regulations include:

  • The definition of hardship has been revised to include certain disaster relief provisions;
  • The requirement that a participant’s 401(k) contributions be suspended for 6 months following a hardship distribution has been eliminated;
  • The requirement that a participant take all available loans from a 401(k) account before taking a hardship distribution has been eliminated;
  • Hardship distributions can now include market earnings;
  • Hardship distributions can now include “Safe Harbor” contributions made by an employer;
  • The previously applicable criteria to establish the need for a hardship distribution has been replaced by a more objective standard that includes a written representation from the plan participant.

Certain changes made by the final regulations are applicable in the 2019 plan year while others are applicable in 2020. Employers that sponsor a qualified retirement plan with hardship language should consult legal counsel to discuss the use of optional language and the deadline for making required changes.

Liam K. HealyLiam K. Healy of Kerr Russell practice clients maintain compliance with state and federal tax laws that govern individuals and businesses helps clients maintain compliance with the myriad of state and federal tax laws and regulations that govern individuals and businesses. His broad range of experience is in business law and business tax matters. Liam’s experience includes: choice and formation of business entities, partnership and shareholder agreements, buy sell agreements, franchise agreements, mergers and acquisitions, business succession planning, real estate, tax free exchanges, non-profit organizations and tax audits. Liam counsels business owner clients through every stage, from formation to the sale of the business.

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