Taking the Hardship Out of Hardship Distributions

Do you or your business administer an employer-sponsored retirement plan? Perhaps in the past you have had employees who need to access their retirement plan in an emergency?

Hardship Distributions

Plan administrators may allow 401(k) plan participants to take a hardship distribution when they have an “immediate and heavy financial need” and have no other readily available financial resources. Safe Harbor distributions are allowed for the following types of expenses:

  1. Medical expenses;
  2. Purchase of a home;
  3. TO prevent an eviction or foreclosure;
  4. Funeral expenses;
  5. Higher education;
  6. Repair damage to a home

Bipartisan Budget Act of 2018 (BBA)

In fall 2019, the IRS published the final regulations based upon the Bipartisan Budget Act of 2018 (BBA). The new regulation makes it easier for participants of employer-sponsored retirement plans to access these funds in the case of unexpected financial hardships. What are the changes? Among other things, the regulations:

  1. Allow employers to broaden the scope of employee contribution sources – including earnings – available for hardship distributions;
  2. Allow employers to grant hardship distributions without first requiring the plan participant to take a plan loan;
  3. Eliminate the six-month suspension of salary deferral and employee after-tax contributions following the receipt of a hardship distribution; and
  4. Replace the plan administrator’s subjective “facts and circumstances” test with an objective, three-prong test to determine whether a hardship distribution is truly necessary to satisfy the participant’s financial need:
    1. The plan participant must first take all other available distributions from the plan;
    2. The participant must represent that he has insufficient funds “reasonably available” to satisfy the financial need; and
    3. The plan administrator cannot have actual knowledge that the participant’s representation is false

What’s Next?

Plan administrators have until the end of 2021 to amend their plan documents. However, they must comply with the changes by January 1, 2020. If you have question on how the BBA applies to your retirement plan, please contact a member of ARGI’s Retirement Plan Services team.


Source: https://federalregister.gov/d/2019-20511

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