When to Amend: Deadline for Compliance with Hardship Distribution Regulations Clarified
The Bipartisan Budget Act of 2018 and the Tax Cuts and Jobs Act of 2017 liberalized the hardship distribution rules applicable to 401(k) and 403(b) plans. On September 23, 2019, the IRS issued final regulations — which we discussed in a previous blog — implementing the new hardship distribution rules. While some of the new rules were discretionary, there are several mandatory provisions that will take effect on January 1, 2020, including:
Plans are prohibited from suspending employee deferral contributions following hardship distributions that occur on or after January 1, 2020; and
Employees must represent in writing (including electronic representations) that they have insufficient cash or other liquid assets reasonably available to satisfy the need giving rise to hardship distribution requests that are made on or after January 1, 2020.
On December 12, 2019, the IRS issued Rev. Proc. 2020-9, clarifying when 401(k) plans must be amended to comply with the elimination of deferral suspension and written representation rules described above: December 31, 2021 for both individually designed and pre-approved 401(k) plans, which aligns with the deadline the IRS established for non-governmental 403(b) plans in Rev. Proc. 2019-39.
Key Takeaway: Although plan documents do not need to be amended immediately, plan sponsors should ensure that they are in operational compliance with all mandatory hardship distribution rules that become effective on January 1, 2020.