The Bipartisan Budget Act of 2018 (“the Act”) changed some hardship distribution rules – generally simplifying things, but we know that any change brings at least temporary complications. The IRS has issued final regulations, so we are ready to start taking action to implement the new rules (or not, as the case may be).
Plan sponsors: If your plan does not include hardships, you don’t have to do anything! Pat yourself on the back and ignore the rest. If your plan has hardships, we will communicate with you directly and provide an amendment, at no additional cost (this is covered by our annual document fee).
Accountants: For the most part this isn’t important to you, but read on if you are interested.
Financial advisors: Be aware of the new rules, and understand that some of these provisions are optional – just because the law has expanded allowable hardships, that doesn’t mean that a particular plan allows them at all, or for all sources of money.
Here are the key changes and commentary:
- Prior to the Act, earnings on 401(k) deferrals contributions were not permitted to be withdrawn (only actual contributions could be withdrawn). After the Act, earnings (as well as contributions) may be permitted to be withdrawn. For plans that we administer, we are generally recommending that distribution of earnings be permitted – it’s difficult to keep track of contributions, especially in takeover situations, and we don’t think our plan sponsors care if participants take out contributions plus earnings.
- Prior to the Act, employer safe harbor and similar special contributions were not permitted to be withdrawn. After the Act, these contributions (as well as earnings) may be permitted to be withdrawn. For plans that we administer, we are reviewing on a case-by-case basis and leaning towards NOT allowing hardships from these accounts.
- Prior to the Act, it was sometimes difficult for employers to confirm a distribution was necessary to satisfy a financial need. After the Act, the participant can certify to certain conditions being met.
- Prior to the Act, if a plan used safe-harbor hardship distribution provisions, a six-month suspension of deferrals was required after a hardship distribution (the well-meaning logic being that if you had a hardship, you shouldn’t be able to afford to make deferral contributions). This required suspension has been eliminated.
- Prior to the Act, if a plan used safe-harbor hardship distribution provisions, all available plan loans had to be taken before requesting a hardship distribution. This requirement has been eliminated.
- After the Act, safe harbor hardship provisions have been expanded and/or clarified to include casualty losses and disaster losses.
This was a quick summary and there were certainly some errors of omission (!).