ERISA-Extra Winter 2020
Monday, April 6, 2020
Posted by: Abbey Kwiat
IRS issues final hardship regulations
401(k) plans that have hardship withdrawal provisions allow participants to access their savings early for certain reasons. But tax law restrictions place burdens on participants who take hardship distributions—and on the plans that allow them. Recently issued IRS regulations offer some relief. The final regulations closely follow the IRS’s proposed regulations and reflect various statutory changes made by 2018’s Bipartisan Budget Act and other legislation. The IRS says that plans that complied with the proposed regulations will satisfy the final regulations.
While some changes are optional, others are mandatory for plans that allow hardship withdrawals.
Definition of hardship withdrawals
Previous rules said that a 401(k) plan may provide that an employee can receive a distribution of elective contributions from the plan on account of hardship. A hardship distribution may be made only because of an immediate and heavy financial need and only in an amount necessary to meet the financial need.
Plans may make hardship distribution determinations based on all relevant facts and circumstances. However, for administrative simplicity, many plans instead rely on “safe harbors” in IRS regulations to determine whether a distribution is made on account of an employee’s hardship.
The safe harbor rules provide that distributions for certain types of expenses are deemed to be made on account of an immediate and heavy financial need. In addition, distributions are deemed necessary to satisfy an immediate and heavy financial need if certain requirements are met. Under prior law, one such condition was that, after the distribution was received, the employee could not make elective contributions or employee contributions to the plan (and any other plans maintained by the employer) for at least six months.
What the final regulations say
The final regulations modify the safe harbor list of expenses in the existing regulations by:
1. Adding the “primary beneficiary of the plan” as a qualified individual for whom medical, educational and funeral expenses may be incurred;
2. Allowing hardship distributions for repairs of damage to an employee’s principal residence that would qualify for a casualty loss deduction, without regard to whether the loss occurs in a federally declared disaster area;
3. Adding a new type of expense related to employee expenses incurred as a result of certain disasters.
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