In 2019, the IRS issued final regulations on hardship distributions, as directed under the Bipartisan Budget Act of 2018. The regulations made several changes to the requirements plan sponsors must impose on participants seeking hardship distributions. The changes were effective for hardship distributions made on or after January 1, 2020.
Uniform Standard and Participant Representation of Need The final regulations changed the previous rules by requiring plan sponsors to apply a uniform standard for determining that a hardship distribution is necessary to meet an immediate and necessary financial need. The regulations require participants seeking a hardship distribution to take any distribution available to them under the plan or any other employer-sponsored plan. The distribution also can be no more than is necessary to meet the need. Additionally, the participant must certify in writing that they have no available cash or liquid assets to meet the financial need. If those requirements are met, a participant may take a hardship distribution from the plan.
Taking a Plan Loan No Longer Required Previously, participants had to take any available plan loan before taking a hardship distribution. The final regulations changed that requirement. While the employer may still choose to require that any potential plan loans be taken before allowing a hardship distribution, the IRS rules no longer impose this requirement.
Six-Month Contribution Suspension Eliminated Similarly, the final regulations changed prior rules requiring participants to suspend contribution deferrals for the six months after they received a hardship distribution. Now, participants may continue deferring plan contributions following their hardship distribution.
Expanded Accounts from Which Participants May Take a Distribution Retirement plan participants (who are not enrolled in custodial 403(b) plans) can now access hardship distributions from all the different funding sources, including:
As employers continue to administer hardship distributions, they should familiarize themselves with the final regulations and continue to work with their service providers to ensure compliance.
PPI Benefit Solutions does not provide legal or tax advice. Compliance, regulatory and related content is for general informational purposes and is not guaranteed to be accurate or complete. You should consult an attorney or tax professional regarding the application or potential implications of laws, regulations or policies to your specific circumstances.
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