On November 14, 2018, the IRS issued much-awaited proposed regulations relating to hardship distributions from 401(k) plans. The new guidance implements changes to the 401(k) plan hardship distribution provisions that were adopted as part of the Tax Cuts and Jobs Act of 2017 (TCJA) and the Bipartisan Budget Act of 2018.
The new rules liberalize the 401(k) hardship distribution “safe harbor” requirements, making it easier for participants to obtain hardship distributions from their plan accounts. This issue of Tax Advisor Weekly will summarize the changes.
6-Month Suspension
Under the prior safe harbor 401(k) hardship distribution rules, a participant who took a hardship distribution was required to have their salary deferral contributions to the plan suspended for six months. The new rules eliminate this requirement. Plan sponsors may optionally make this provision effective for hardship distributions made during plan years commencing after December 31, 2018 (January 1, 2019, for calendar year plans). The change is mandatory starting in 2020.
If a plan sponsor elects to make the new rule effective in 2019, then with respect to hardship distributions that were made in the second half of 2018, the plan sponsor may either lift the suspension effective January 1, 2019, or leave the suspension in place for the full six months.
If a plan sponsor elects to implement this change in 2019, a plan amendment would be required prior to the end of the plan year in which the change is effective (December 31, 2019, for calendar year plans).
Plan Loan Requirement
Under the prior rules, participants were ineligible for a hardship distribution unless they had first taken all available nontaxable loans under all plans within the employer’s controlled group. This requirement has been eliminated effective as of the first plan year commencing after December 31, 2018 (January 1, 2019, for calendar year plans). The change is optional, and plan sponsors may continue to enforce the plan loan requirement going forward. If the plan sponsor elects to eliminate this requirement in 2019 because the change is optional, calendar year plans must be amended no later than December 31, 2019, to implement the change.
