Since October of last year, the Internal Revenue Service has published proposed regulations which provide guidance on the changes to hardship withdrawals made by the Bipartisan Budget Act (“BBA”).
Elimination of six-month suspension following hardship distribution
The proposed regulations require plans to eliminate the 6 month suspension of elective deferrals beginning January 1, 2020, but allow plans to remove the suspension as early as the first day of the first plan year beginning after December 31, 2018. This applies to hardship withdrawals made prior to 2019 so that a calendar year plan could remove the deferral suspension on January 1, 2019 for a participant that took a hardship withdrawal after June 30, 2018. INTRUST is removing the deferral suspension period for plans that have not requested to leave it in place through the end of 2019.
Establishing Financial Need
The BBA removed the requirement that a participant take all available plan loans before taking a hardship. The proposed regulations clarify that such a requirement remains optional. INTRUST is removing the requirement that participants take all available plan loans first for plans that have not requested to leave the requirement in place. The BBA added an additional requirement that participants certify in writing that they have insufficient cash or other liquid assets to satisfy the financial need for hardships requested after December 31, 2020. This requirement can be applied early. INTRUST is adding the certification to all hardship withdrawal forms during 2019.
Availability of more sources for hardship distributions
The proposed regulations have added a safe harbor hardship expense category for expenses and losses (including loss of income) incurred as a result of a federally declared disaster. To qualify, a participant’s principal residence or place of employment must be located in a federally declared disaster area at the time of the disaster. INTRUST is adding this hardship expense category to all hardship withdrawal forms during 2019.
In addition, the proposed regulations provided clarification on an unanticipated consequence of the BBA disallowing casualty losses not in a federally declared disaster area. A federally declared disaster is not required for purposes of the safe harbor hardship expense related to repairs to a principal residence.
The regulations clarified that plans may optionally allow hardship withdrawals from QNECs, QMACs, and earnings on all sources. INTRUST is not making additional contribution types eligible for hardship withdrawal without a plan sponsor’s request but is making earnings on currently available hardship sources available for withdrawal.
The above described regulations apply to 403(b) plans as well with the following 2 caveats. First, the BBA did not extend the contribution types on which earnings can be withdrawn to elective deferral accounts in 403(b) plans. Second, QNEC and QMAC sources in a 403(b) plan held in a custodial account remain ineligible for hardship withdrawal.
Please contact your Retirement Advisor if you have any questions about the proposed regulations or if you would like to change the way hardships are administered for your plan. We will have a hardship amendment ready for adoption by the end of 2019.