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Final Hardship Distribution Regulations, Part One: Key Changes and Deadlines for Plan Sponsors

Last week, the Department of Treasury and the IRS issued final regulations regarding hardship distributions from 401(k) and 403(b) plans.  The final regulations respond to comments based on earlier proposed regulations and make a number of significant changes to the existing IRS rules that apply to hardship distributions.

Given the detailed material in the regulatory preamble as well as the final regulations themselves, we intend to release a series of blog entries analyzing the new rules for hardship distributions.  Below is a summary of the issues raised in the final regulations that we will address in more detail in upcoming blog entries:

  • Plan Amendments/Plan Action Required: Individually-designed 401(k) plans that currently permit hardship distributions will likely need to be amended to reflect the final regulations by December 31, 2021 – but operational changes will be needed to comply with the new regulations by January 1, 2020. (Individually-designed 403(b) plans and pre-approved 401(k) and/or 403(b) plans might have an earlier amendment deadline.) Plan sponsors that previously took action in response to the proposed regulations should review prior plan amendments and administrative changes to confirm operational and plan document compliance with the final regulations.

  • Elimination of Six-Month Suspension of Contributions: Effective for hardship distributions on or after January 1, 2020, 401(k) and 403(b) plans cannot impose a six-month suspension of contributions following a hardship distribution.

  • Changes to Safe Harbor EventsThe final regulations modify the list of distributions deemed to be made on account of an immediate and heavy financial need by revising the casualty loss definition and adding a new FEMA disaster category, as well as incorporating prior IRS guidance on hardship distributions for primary beneficiaries. The revised list may be applied to hardship distributions as early as January 1, 2018.

  • Elimination of Requirement to Take Plan Loans: Effective January 1, 2019, employees are not required to take plan loans before receiving a hardship distribution.

  • Elimination of “Facts and Circumstances” Analysis: The facts and circumstances analysis for determining whether a hardship distribution is necessary to satisfy a financial need is eliminated in favor of a general standard that relies on three objective prongs (comparable to what was in the proposed regulations).

  • Expanded Hardship Distribution Sources for 401(k) Plans: Sources available for hardship distributions now include earnings on elective deferrals, QNECs, QMACs, and earnings on QNECs and QMACs, regardless of when contributed or earned.

  • Expanded Hardship Distribution Sources for 403(b) Plans: Earnings on pre-tax deferrals made to a 403(b) plan continue to be ineligible for hardship distributions. However, QNECs and QMACs would be eligible for hardship distributions in a 403(b) plan that are not held in a custodial account. QNECs and QMACs in a 403(b) plan that are held in a custodial account continue to be ineligible for hardship distributions.

© 2020 Proskauer Rose LLP.

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About this Author

Paul Hamburger Employee Benefits Law Attorney Proskauer Rose Law Firm
Partner

Paul M. Hamburger is co-chair of the Employee Benefits & Executive Compensation Group and head of the Washington, DC office. Paul is also a leader of the Practice Center’s health and welfare subgroup and a member of Proskauer’s Health Care Reform Task Force.

Paul provides technical knowledge and advice to employers on all aspects of their employee benefit programs, and advises employee benefit plan trustees and service providers on ERISA and employee benefit plan-related matters. He has extensive experience in negotiating service provider...

202.416.5850
Jennifer Rigterink, Proskauer Law Firm, New Orleans, Labor and Employment Law Attorney
Associate

Jennifer Rigterink is an associate in the Labor Department and a member of the Employee Benefits & Executive Compensation Group.

In the employee benefits area, Jennifer’s practice focuses on an array of tax and benefits issues impacting both multiemployer and single-employer benefit plans and plan fiduciaries. She assists clients on matters pertaining to plan administration, design and qualification, as well as regulatory, legislative and legal compliance.

Prior to joining Proskauer, Jennifer clerked for Judge Jacques L. Wiener, Jr., in the United States Court of Appeals for the Fifth Circuit and Judge Yvette Kane in the United States District Court for the Middle District of Pennsylvania.

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