May Employees Take Hardship Distributions Under Their 401(k) Plan? Benefits Guidance in the Time of COVID-19
As temporary layoffs and furloughs become more prevalent during the COVID-19 outbreak, employers have been asking whether they may allow employees to take hardship distributions under their Section 401(k) plans for expenses and losses resulting from COVID-19.
Under the IRS hardship distribution final regulations, employers were permitted to add a new safe harbor hardship category that would allow an employee to take a hardship withdrawal to cover expenses and losses (including loss of income) incurred by the employee on account of a disaster declared by FEMA under the Stafford Act. To qualify, either the employee’s principal residence or place of employment must be in the disaster area designated by FEMA for assistance. Expenses and losses incurred by family members do not count for this purpose.
If the employer’s 401(k) plan incorporates the IRS safe harbor definition of hardship, employees whose principal place of residence or principal place of employment is in New York, Washington or California (as of the date of this Blog) may take a hardship withdrawal from their 401(k) accounts for expenses and losses (including loss of income) incurred on account of the COVID-19 outbreak. At this time, employees whose principal place of residence or principal place of employment is in a state other than New York, Washington or California may not be eligible for a hardship withdrawal to cover expenses and losses from COVID-19 because FEMA has not declared any other state to be a major disaster area. However, employees in these other states may be able to rely on other provisions of the IRS safe harbor to take a hardship withdrawal. For example, the IRS safe harbor permits a hardship withdrawal to prevent eviction from the employee’s principal residence or foreclosure on the mortgage on that residence.
Finally, the IRS could provide special disaster relief expanding the scope of the hardship to include, for example, hardship withdrawals that would cover expenses and losses incurred by the employee’s family members as a result of COVID-19. Further, as Congress moves rapidly to approve a stimulus package, legislation may include an expansion of hardship distributions (and loans) so further guidance may be forthcoming.