Are You Ready for the New Retirement Plan Hardship Rules?

As part of the Bipartisan Budget Act of 2018 (BBA 2018) approved by Congress on February 9, 2018, and the subsequent release of IRS proposed regulations on November 14, 2018, several changes will be effective for hardship distributions processed in plan years beginning after December 31, 2018 (i.e., January 1, 2019, for calendar-year plans). Generally, the changes will make it easier for participants to receive a larger hardship distribution and will alleviate some of the employer administrative burden related to processing hardship distributions.

Following is a summary of these important changes:

While the proposed regulations clarify the intentions of Congress (assuming there are no changes to them after the customary comment period), there are still some unanswered questions, including the timing of when, and manner of how, plans must adopt amendments to their preapproved plan documents. At the current time, we believe all plans that have adopted hardship provisions will need to amend their plan documents by the end of the plan year that begins in 2019. For calendar year plans, the amendment will likely be required by December 31, 2019.

In the interim, plan sponsors are required to operate their retirement plans in good-faith compliance with the law. To simplify the administrative burden, many third-party administrators, including Wipfli LLP (Wipfli), are planning to adopt a plan sponsor amendment on behalf of all clients outlining certain default provisions related to processing hardship distributions. Following are the common default provisions most clients expect to adopt for plan years beginning in 2019:

An Important Note for 403(b) Plan Sponsors

For 403(b) plan sponsors, the IRS notes that Internal Revenue Code 403(b)(11) was not amended by the BBA 2018. This means that income attributable to section 403(b) elective deferrals (both pretax and Roth) continues to be ineligible for distribution because of hardship. However, qualified non-elective and qualifying matching contributions, including safe harbor contributions in a 403(b) plan that are not in a custodial account (i.e., mutual funds), may be distributed because of hardship. On the other hand, qualified non-elective and qualifying matching contributions, including safe harbor contributions that are in a custodial account, continue to be ineligible for distribution because of hardship.

In Summary

Our recommendation is for clients to discuss with their third-party administrators how they plan to administer their retirement plans to comply with the new hardship guidance. This action will help to mitigate the chance that an operational error occurs inadvertently. We are expecting the IRS to further clarify the timing of the required hardship amendment when the proposed regulations are finalized.

If you have any questions, feel free to contact any one of Wipfli’s Employee Benefits leaders including Tom Krieg, Bob Buss,  Marci Boyarski, Angie Whiteside and Deb Teske or talk to your Wipfli relationship executive.