July 10, 2020

Volume X, Number 192

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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 YorkWashington 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.

©2020 Epstein Becker & Green, P.C. All rights reserved.National Law Review, Volume X, Number 86

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About this Author

Sharon Lippet, Epstein Becker Law Firm, Employee Benefits Attorney
Member

SHARON L. LIPPETT is a Member of the Firm in the Employee Benefits practice, in the New York office of Epstein Becker Green. She has substantial experience in matters relating to tax-qualified and nonqualified retirement plans, welfare plans, cafeteria plans, fiduciary matters, and plan asset entities. Her practice focuses on the design, establishment, communication, and legal compliance of compensation and benefit arrangements, including non-qualified deferred compensation plans and qualified retirement plans.

212-351-4630
Rina Fujii Employment Lawyer Epstein Becker
Associate

Rina Fujii is an Associate in the Employee Benefits and Executive Compensation practice, in the New York office of Epstein Becker Green.

Ms. Fujii:

  • Advises clients in connection with executive compensation and employee benefits-related aspects of corporate matters, including M&A, securities offerings, financings, investigations, and restructurings
  • Designs, and drafts documents for, public and private company compensation programs, including long-term equity plans and award agreements
  • Counsels clients on trends and best practices in corporate governance and executive compensation
  • Drafts and negotiates employment, retention, severance, and termination agreements
  • Conducts due diligence in connection with executive compensation, employee benefits, and labor and employment matters for M&A transactions, and drafts and negotiates provisions on such matters in purchase agreements
  • Advises on Section 409A compliance issues

Before joining Epstein Becker Green, Ms. Fujii was an attorney in the Executive Compensation group of an international law firm.

212-351-4686
Gretchen Harders, epstein becker green, new york, Patient Protection Affordable
Member

GRETCHEN HARDERS is a Member of the Firm in the Employee Benefits practice, in the firm's New York office.

Ms. Harders' practice focuses on all aspects of executive compensation and employee benefits law. Ms. Harders counsels a broad range of clients on executive compensation and employee benefit issues, tax-qualified and non-qualified plans, 401(k) plans, the Patient Protection and Affordable Care Act, deferred compensation, executive incentive compensation plans, executive employment and severance agreements, Section 409A...

212-351-3784