On February 9, 2018, the Bipartisan Budget Act (the “Act”) was signed into law. The Act directed the IRS to revise regulations governing hardship withdrawal provisions in qualified plans. The legislative goal was to expand the circumstances under which hardship withdrawals may be made and eliminate some of the penalties associated with hardship withdrawals.
On November 14, 2018, the IRS released proposed regulations as directed in the Act. All of the following changes are optional for a qualified retirement plan’s 2019 Plan year and may be implemented operationally, effective January 1, 2019. Plan Sponsors may also wait until the end of the second calendar year that begins after the issuance of final regulations to amend the Plan to conform to the required changes. Key changes outlined in the proposed regulations include:
- The six-month suspension of 401(k) contributions will be eliminated (Required for hardship withdrawals after January 1, 2020).
- A new type of qualifying expense related to disaster relief will be added to the list. The IRS indicated that this addition will eliminate delay or uncertainty concerning access to plan funds following a disaster that occurs in an area designated by the Federal Emergency Management Agency for individual assistance (May be made effective for distributions made on or after January 1, 2018).
- Allow for the Plan administrator to rely upon the participant’s written representation that he/she has insufficient cash or liquid assets to satisfy the financial need, but only to the extent that the plan administrator does not have actual knowledge to the contrary.
- The requirement that a loan be taken from the plan before a hardship withdrawal is approved can be eliminated (Optional change).
- Permit hardship distributions from earnings on elective deferrals (Optional change).
- Permit hardship distributions from QNECs, QMACs, and earnings on these sources (Optional change).
Once the final regulations are issued, plan procedures should be reviewed to ensure compliance with the regulations and to determine whether adoption of conforming plan amendments will be necessary. Until then, plan administrators should determine whether they intend to implement any optional changes.
You may contact any member of the McNees Wallace & Nurick Labor and Employment Practice Group if you have any questions regarding this article.