New hardship rules became effective January 1, 2019, for the calendar year plans, thanks to the Bipartisan Budget Act of 2018. Most of these rules are welcome changes which should make more funds available to plan participants who are experiencing financial hardship. There is some concern, however, that there will be more “leakage” of retirement plan savings.
Employers should be aware of the new rules and coordinate their implementation with their plan service providers. While the rules are effective as of January 1, plan documents do not need to be amended until the end of the plan year. Recordkeepers will need to update the plan specifications on their systems to accommodate the new rules.
Here is a summary of the changes:
- Elimination of the suspension of salary deferrals for 6 months after a hardship distribution is approved. This is required effective January 1, 2020, but plans may be amended to apply the rule effective January 1, 2019.
- Loans are no longer required to be taken before a hardship withdrawal is distributed. However, any other distributions permissible under the plan must be taken before a hardship withdrawal.
- Unless the Plan Administrator has the knowledge to the contrary, a participant’s statement (in writing or by electronic means) that they do not have any other means to satisfy the immediate and heaving financial need may be relied upon.
- Investment earnings may now be distributed from a 401(k) plan, but not 403(b) plans. Previously, 401(k) plans could not distribute investment earnings accrued after 1988 on 401(k) and other contributions that were eligible for a hardship withdrawal.
- 401(k) plans may, but are not required to, distribute safe harbor contributions, qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs) in a hardship withdrawal. This change does not apply to 403(b) custodial accounts.
- Recent changes to the casualty loss deduction rules are ignored for purposes of determining if there is an immediate and heavy financial need. Any expenses and losses on account of a federally declared disaster are deemed to be an immediate and heavy financial need.
RTD’s Retirement Plans team is prepared to help our clients navigate the new rules and coordinate with their service providers to implement the new rules and communicate with plan participants. If you have questions regarding how your plan will be impacted please contact us at (800) 893-4725 or retire@rtdfinancial.com.