PlanFacts

Hardship Distribution Rules Are Changing

Workers who save for retirement in their employer’s 401(k) plan generally don’t have access to their savings until they change jobs or retire – unless they suffer a financial hardship. The retirement plan laws permit a plan participant to take a hardship distribution of their elective deferrals while they’re still working if they have a financial hardship that meets certain requirements. Your plan document must include hardship distribution language in order for participants to take a hardship distribution.  Recent legislation and subsequent IRS guidance have changed the rules governing these hardship distributions. 1 These changes expand the availability of hardship distributions for plan participants and simplify the steps plans must take when deciding whether a distribution is necessary to meet a hardship. Plan sponsors should understand how these changes affect their plan operations and when they will be required to implement the changes. 

Existing Hardship Distribution Rules

Special rules apply when participants take a hardship distribution of 401(k) plan elective deferrals. A participant must experience an “immediate and heavy financial” need and demonstrate that the hardship distribution is necessary to satisfy the financial need. The amount distributed cannot exceed the amount needed, including amounts to pay taxes or penalties as a result of the distribution.

Most 401(k) plans adopt the regulatory safe harbor rules for hardship distributions, which provide six types of expenses that are deemed to meet the immediate and heavy financial need requirement and rules for determining whether a distribution is necessary to meet that need.



A hardship distribution is considered to be necessary to satisfy a financial need if:
 
  • The participant has obtained all other distributions and non-taxable loans available under all plans of the employer.
  • The participant isn't allowed to make contributions to a deferred compensation plan of the employer for six months after the hardship distribution.
If a plan does not follow the safe harbor rules, the plan administrator must apply the hardship rules on a facts and circumstances basis. 

Changes to Hardship Distributions Rules

As a result of law changes, including the Bipartisan Budget Act of 2018, and proposed Treasury regulations, the following changes apply.



Contact your Newport Group Representative for more information.



To download a copy of this article click here.


Footnote
1 IRS, Treasury, Hardship Distributions of Elective Contributions, Qualified Matching Contributions, Qualified Non-elective Contributions, and Earnings, 26 CFR 1, 83 FR 56763, November 14, 2018, https://www.federalregister.gov/documents/2018/11/14/2018-24812/hardship-distributions-of-elective-contributions-qualified-matching-contributions-qualified

Disclaimer 
Newport Group and its affiliated companies do not render tax or legal advice. Clients should consult their tax or legal advisors with respect to specific tax or legal decisions.

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Newport Group, Inc. and its affiliates provide recordkeeping, plan administration, trust and custody, consulting, fiduciary consulting, insurance and brokerage services. Fiduciary consulting services are provided through Newport Group Securities, Inc., an SEC-registered investment adviser and FINRA-registered broker-dealer, and Newport Group Consulting, LLC, an SEC-registered investment adviser. Newport Group Securities, Inc. and Newport Group Consulting, LLC are affiliates of Newport Group, Inc. All securities transactions are provided through Newport Group Securities, Inc., in its role as broker-dealer. All fiduciary consulting services are provided through the registered investment advisers. When offering variable insurance products, Newport Group Securities, Inc. acts solely in its capacity as a broker-dealer. Trust and custody services provided by Newport Trust Company, a New Hampshire state chartered trust company and wholly owned subsidiary of Newport Group, Inc.