401k and 403b Hardship Rules Changes in 2020

On September 23, 2019, the IRS published final regulations for hardship distributions for both 401(k) and 403(b) plans. The new rules relax existing restrictions on taking hardship distributions from defined contribution plans.  The Final Regulations make the following mandatory and optional changes to the hardship distribution requirements.

Mandatory Changes

Elimination of the Six Month Contribution Suspension Requirement – The new rules remove the six month suspension rule which prevents participants who have taken hardship distributions from contributing to the plan for six months following the hardship distribution.  This is a required change on or after January 1, 2020, but a plan may elect to remove the six month suspension requirement as early as January 1, 2019.

Creation of a General Financial Need Standard – Previously, the determination of whether a distribution was necessary to meet a financial need was based on all relevant facts and circumstances. Under this new general rule,

  • a hardship distribution may not exceed the amount of the need*,
  • the employee must have obtained other available distributions under the employer’s plans, and
  • the applicable employee must represent (in writing, electronically, or in another form permitted by the IRS) that he/she has insufficient cash or other liquid assets to satisfy the immediate and financial need for which the hardship is being sought.

*It is important to note that the plan administrator cannot have actual knowledge that is contrary to the employee’s representation of need. 

This is a required change for hardship distributions on or after January 1, 2020, and may be an optional change for hardship distributions as early as of January 1, 2019.

Optional Changes

Elimination of the Plan Loan Requirement – The new rules remove the requirement that participants take all available plan loans before taking a hardship distribution (although participants still must exhaust all other in-service withdrawals available under the plan). This is an optional change which means plans can continue to require participants to take a plan loan before being eligible for a hardship withdrawal if they choose.

Expansion of hardship sources – The new rules remove restrictions for hardship distributions from qualified non-elective contributions (QNECs), qualified matching contributions (QMACs), and Safe Harbor contributions.

Include earnings for hardship withdrawal – Effective in 2020, earnings on 401(k) contributions can be distributed for hardships, as can profit-sharing and stock-bonus contributions. Previously, participants could only withdraw contributions, not earnings.

For 403(b) plans, earnings would remain ineligible for hardship withdrawals because of a statutory prohibition that Congress didn’t amend.

Provide disaster relief – The new rules expand the situations deemed to create an “immediate and heavy financial need” to include expenses and losses incurred by the employee because of a federally declared disaster, if the employee’s principal residence or place of employment was in the disaster area at the time of the disaster.  Of note, there is no deadline by which a disaster-related hardship distribution must be made following the federal disaster.

Expansion of Safe Harbor Circumstances for Qualified Beneficiary Expenses – The new rules expand the safe harbor circumstances to include qualifying medical, educational, and funeral expenses for a participant’s “primary beneficiary under the plan.”

Defined contribution plans that permit hardship distributions will need to be amended to reflect these new rules by December 31, 2021, but operational changes will be needed to comply with the new regulations by January 1, 2020.  You will likely need updates to the Summary Plan Description and other communication documents that reference hardship distributions. We can assist or advise on plan amendments.

 Please contact Stacey Spencer at 317-260-4421 or sspencer@greenwaltcpas.com for further clarification of these new rules and how they might affect your 401k or 403b plan.