Hardship Distribution Update
Effective for plan years beginning after December 31, 2018, several rules applicable to hardship distributions from retirement plans have been simplified and expanded. While not currently available, a plan amendment formalizing these changes will be adopted in the future. The specific timing of the amendment is subject to future IRS guidance, but we expect that it may be as early as this year. We hope to adopt the amendment on a document-sponsor level, so employers will not need to adopt the amendment unless they would like to override any of the default provisions. Even though the amendment has not yet been adopted, the following default provisions will automatically take effect for plan years beginning after December 31, 2018 (note that these provisions only apply to plans that currently permit hardship distributions):
- Suspension of Ability to Make Salary Deferrals: Going forward, the six-month elective deferral suspension requirement that previously applied to hardship distributions from elective deferrals has been eliminated. However, a participant who has received a hardship distribution from his or her elective deferral account prior to the beginning of the 2019 plan year will continue to be suspended from making elective deferral contributions for a period of six months after the receipt of the hardship distribution.
- Earnings Available for Hardship Distributions: Hardship distributions may be taken from both the principal (the amount that is contributed) and earnings on 401(k) deferrals. This is a change from prior law, which only permitted hardship distributions from the principal amount. Note that this does not apply to 403(b) deferrals.
- Need to Obtain All Available Loans: Under prior law an employee was typically required to take all available loans from the plan before he or she could receive a hardship distribution. This requirement has also been eliminated.
- Contribution Sources Available for Hardship Distributions: The law now permits hardship distributions from safe harbor contributions, QNECs, and QMACs (note that this does not apply to 403(b) plans using custodial accounts). However, we will not expand hardship distributions to include these contribution sources unless we are specifically instructed to do so.
It is important to note that not all employers allow participants to take hardship distributions from any or all contribution sources in their retirement plan. This amendment will not automatically add hardship distributions or expand contribution sources eligible for hardship distributions. If an employer wishes to add hardship distributions or modify the contribution sources eligible for hardship distributions we will draft a plan-specific amendment to accomplish their objectives.
Juhl Stoesz, Vice President, Compliance and General Counsel