Hardship Distribution Changes: What's Next? - McDermott Will & Emery

Hardship Distribution Changes: What’s Next?



In 2018, the Treasury Department and the IRS issued new hardship distribution rules applicable to defined contribution plans, and many plans have begun administering these new rules. While plan sponsors may want to wait for further IRS guidance before amending their plans, they should take steps now to inform employees of changes in hardship distribution administration.

In Depth

Since the Bipartisan Budget Act of 2018 (Budget Act) was enacted in early 2018, there has been considerable discussion in the benefits community about the Budget Act’s new hardship distribution rules applicable to 401(k) plans, including:

  • The elimination of the requirement that a participant’s contributions be suspended for at least six months following the receipt of a hardship distribution and the prohibition against such suspensions for hardships distribution made on or after January 1, 2020;
  • The elimination of the requirement that a participant take all available loans before receiving a hardship distribution; and
  • An expansion of the sources from which a plan can permit hardship distributions, including qualified non-elective contributions (QNECs), qualified matching contributions (QMACs), employer safe harbor contributions, earnings thereon and earnings on deferral contributions.

The Internal Revenue Service (IRS) provided further guidance on the Budget Act’s new rules, as well as certain other rules related to hardship and military service distributions, in November 2018 in the form of proposed regulations (see our November 15, 2018, publication for a detailed discussion of the proposed regulations). Plan sponsors can generally implement these new distribution rules for plan years beginning after December 31, 2018, and many plan sponsors have already begun administering hardship distributions accordingly.

However, plan sponsors should not be in a rush to amend their plans. The proposed regulations do not impose an amendment deadline, and, because they are in proposed form, the IRS could modify the requirements of the new rules in the final regulations. Thus, many plan sponsors, may find it beneficial to hold off on amending their plans for the time being. While plan sponsors can amend their plans before final regulations are issued, they may then end up needing to amend for the hardship distribution rules a second time if the final regulations set forth effective dates or modified rules that were not included in the proposed regulations.

In the meantime, plan sponsors that have adopted changes in hardship distribution administration based on the new rules should ensure that these changes are promptly communicated to employees. The new rules generally make hardship distributions less onerous for employees, so they will want to know sooner rather than later about the easing of any restrictions that previously applied. In addition, effective for hardship distribution made on or after January 1, 2020, any requirement that a participant’s contribution be suspended as a condition of obtaining a hardship distribution needs to be eliminated.