Smarter and Not Harder: The New IRS Hardship Distribution Regulations

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The Treasury Department and the IRS recently finalized new hardship distribution rules applicable to defined contribution plans. Plan sponsors should prepare for operational changes to comply with the new regulations, including some beginning January 1, 2020.

In Depth


401(k) and 403(b) retirement plans may allow participants to take hardship distributions to satisfy an immediate and heavy financial need, provided certain conditions are satisfied. Treasury Department and Internal Revenue Service (IRS) regulations provide rules regarding these hardship distributions, including a safe harbor for plan sponsors to determine that a distribution is necessary to satisfy an immediate and heavy financial need. As described in our November 15, 2018, publication, in November 2018, the Treasury Department and the IRS published proposed regulations modifying certain hardship distribution rules, including rules to account for statutory changes made by the Bipartisan Budget Act of 2018.

Final Regulations

The Treasury Department and the IRS recently finalized the new hardship distribution regulations. The final regulations are substantially the same as the November 2018 proposed regulations, with some limited clarifications and more definitive effective dates. The following summarizes the key features of the final regulations and applies to both 401(k) and 403(b) plans unless otherwise noted.

Mandatory Changes Effective January 1, 2020

  • Removal of 6-Month Contribution Suspension: Under the prior safe harbor, plans were required to suspend a participant’s contributions for 6 months following a hardship distribution. Effective January 1, 2020, plans may not suspend participant contributions following a hardship distribution. Under the proposed regulations, this change was optional as of the first day of any plan year beginning on or after December 31, 2018. Under the final regulations, this change is mandatory for all hardship distributions made on or after January 1, 2020. For hardship distributions made prior to January 1, 2020, plans have the option to continue administering the suspension through the end of the 6-month period (even if this period ends on or after January 1, 2020) or to lift the suspension as of an earlier date, regardless of the fact that the suspension has not lasted the full 6 months.
  • New Immediate and Heavy Financial Need Standard: Prior hardship distribution regulations applied a “facts and circumstances” test to determine whether a hardship distribution was necessary to satisfy a participant’s financial need. Effective January 1, 2020, the facts and circumstances test is replaced by a new standard requiring that:
    1. The participant obtain all other currently available distributions under the plan and all other deferred compensation plans of the plan sponsor and its affiliates;
    2. The participant provide a written representation (including electronically or on a recorded telephone line) that the participant has insufficient cash or other liquid assets reasonably available to satisfy the need; and
    3. The plan sponsor does not have actual knowledge that is contrary to the participant’s representation.

The new standard was optional as of the first day of any plan year beginning on or after December 31, 2018, but is mandatory for all hardship distributions on or after January 1, 2020. The final regulations also clarified two points related to this new standard. First, the final regulations clarify that the second requirement is not intended to mean that the participant does have any cash or assets available, but that the participant does not have any cash or assets available that are not earmarked for payment of another obligation in the near future (such as rent). Second, the final regulations clarify that the third requirement does not impose a duty on a plan sponsor to inquire into the financial condition of an employee, and only applies in very limited circumstances in which the plan sponsor has actual knowledge that an employee’s representation is not true


Optional Changes

  • Elimination of Requirement to First Take Plan Loans: Participants were previously required to take all available loans under a plan and all other employer plans before taking a hardship distribution. Plans are now permitted (but not required) to remove this requirement and allow participants to take hardship distributions even if they have not taken all available loans under the plan and all other employer plans.
  • Expansion of Hardship Distribution Sources: Prior hardship regulations did not permit the withdrawal of earnings on deferral contributions, or the withdrawal of funds in qualified non-elective contribution (QNEC), qualified matching contribution (QMAC), or employer safe harbor contributions accounts. Plans are now permitted (but not required) to allow hardship distributions from these sources. However, for 403(b) plans, earnings on elective deferrals cannot be part of a hardship distribution, and the plan can only permit QNECs and QMACs hardship distributions if the 403(b) plan is not in a custodial account.
  • Addition of New Safe Harbor for Federally-Declared Disasters: The final regulations added a new safe harbor event for losses incurred by a participant due to a federally declared disaster. At the time of the disaster, the participant’s principal residence or principal place of business must be within the area designated for individual assistance by the Federal Emergency Management Agency (FEMA). Plans are permitted (but not required) to permit hardship distributions based on this safe harbor event. The final regulations state that the Treasury Department and the IRS expect this new safe harbor event to replace the prior practice of publishing separate disaster-relief announcements, and that this change is intended to eliminate any delay or uncertainty regarding access to plan funds that might otherwise occur following a major disaster. In contrast to historical disaster-relief announcements, however, this new safe harbor event considers only expenses and losses of an employee (and not of the employee’s relatives and dependents).


  • Home Casualty Loss Expenses: The final regulations clarify that the safe harbor event for home casualty losses does not require that a home be located in a federally declared disaster area. This is consistent with prior hardship distribution regulations, and is helpful in resolving uncertainty created by recent tax legislation that changed the treatment of home casualty losses in other contexts.
  • Primary Beneficiary Expenses: The Pension Protection Act of 2006 provided that certain expenses (educational, medical and funeral) of a participant’s primary beneficiary were included in certain safe harbor events deemed to be an “immediate and heavy financial need” for purposes of hardship distributions. Though plans have been permitted to include these primary beneficiary expenses as safe harbor events for a number of years, and many plans already apply this rule, this change was not previously incorporated into the regulations.

The application of the above rules may vary for plans other than individually designed 401(k) and 403(b) plans, including government plans, pre-approved plans and 409A plans. Sponsors of these types of plans should consult with legal counsel to evaluate the applicability of the new hardship distribution rules.

Next Steps

Operational Changes and Participant Communications

Plan sponsors should ensure that they update plan administration for the mandatory new hardship distribution rules beginning January 1, 2020, as well as any optional changes that they will make. Plan sponsors should also ensure that they promptly communicate changes to employees. The new rules generally make hardship distributions easier for employees to obtain, so employees will want to know about the changes sooner rather than later. In addition, sponsors of safe harbor 401(k) plans, who are required to issue annual safe harbor notices in advance of each plan year, should ensure that they update their notices to reflect hardship distribution changes.

Plan Amendments

Although some of the hardship distribution changes must be implemented effective January 1, 2020 (and may be implemented earlier), plan amendments are not immediately required for individually designed 401(k) plans. The deadline is based on when the IRS includes the changes in its annual required amendment list and will be, at the earliest, December 31, 2021, for calendar year individually designed plans. The regulations confirm that this deadline applies to both the mandatory and optional hardship changes. However, if a plan sponsor chooses not to add an optional hardship change as part of an amendment reflecting the final regulations, but then chooses to add it at a later date, an amendment to reflect such change would need to be adopted by the end of the plan year in which the amendment is first effective.

For individually designed 403(b) plans, the current plan remedial amendment deadline is March 31, 2020. However, the Treasury Department and the IRS state in the final regulations that they are considering publishing separate guidance that would provide for a later 403(b) amendment deadline for amendments relating to the final regulations.

Different amendment deadlines may apply to pre-approved 401(k) and 403(b) plans, and sponsors of other types of plans should consult with legal counsel to ensure the applicable amendment deadlines are met.