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Are You Ready for the New Retirement Plan Hardship Rules?

 

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:

  1. Plans are no longer required to suspend elective deferral contribution for six months following a hardship distribution.
  2. Plans may allow a hardship distribution of not only the original contributions, but earnings on elective deferrals for both pretax and Roth contributions as well as qualified non-elective and qualified matching contributions including safe harbor contributions.
  3. Participants can take hardship withdrawals without having to first take all available plan loans first (if the plan allows loans).
  4. Hardship distribution events are expanded. 

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:

  1. Eliminate Six-Month Suspension Period — All plans will be required to eliminate the six-month suspension period of elective deferrals, following the date a hardship distribution is approved. For hardship distributions processed in 2018, for which the suspension period carries over into the 2019 plan year, the six-month suspension period will continue until the entire period elapses. 
  2. Allow Earnings and Safe Harbor Contributed to Be Distributed From Elective Deferrals — All plans will allow earnings on elective deferrals for both pretax and Roth contributions. If your plan currently limits hardships to employee dollars only, then hardship distributions will continue to be restricted to employee dollars only. If your plan allows hardship distributions from both employee and employer money sources, the plan will also allow dollars to be distributed from qualified non-elective and qualified matching contributions, including safe harbor contributions as applicable. [For 403(b) plan sponsors, see the special rules below.] 
  3. Eliminate Requirement to Take Plan Loan First Before Receiving Hardship Withdrawal — All plans that currently offer loans will no longer mandate that a loan be taken first to meet the financial need prior to taking a hardship distribution.
  4. Hardship Definition Expanded — The proposed regulations modify the safe harbor list of expenses for which distributions are deemed to be made because of an immediate and heavy financial need:
  • Adding “primary beneficiary under the plan” as an individual for whom qualifying medical, educational and funeral expenses may be incurred. (Previously, this was limited to spouse and/or dependent.)
  • Clarifying that a personal residence casualty does not require it to be in a federally declared disaster area (which was an unintended consequence of the Tax Cuts and Jobs Act of 2017).
  • Adding a new qualifying item related to expenses incurred because of certain disasters that the IRS and Congress have provided relief for in the past (tornadoes, wildfires, floods, etc.). This provision is intended to eliminate any delay or uncertainty concerning access to plan funds following a disaster that occurs in an area designated by the Federal Emergency Management Agency for individual assistance. 


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.

Author(s)

Tom Krieg
Thomas Krieg, CPA
Partner
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