In a nutshell, the new rules make these changes: The requirement that participants be prohibited from making elective or employee contributions to any employer plan for six months after taking a hardship withdrawal is eliminated. See below for a breakdown of the updates. 6. These regulations reflect the changes made by both the Tax Cuts and Jobs Act of 2017 and the Bipartisan Budget Act of 2018. Under the proposed regulations effective January 1, 2020, the 6-month suspension from making elective contributions is no longer allowed. (Reg. In addition, they may be subject to an additional tax on early distributions of elective contributions. In determining the existence of a need and of the amount necessary to meet the need, the plan must specify and apply nondiscriminatory and objective standards. Under what circumstances can a participant get a hardship distribution from a retirement plan? Hardship distributions are includible in gross income unless they consist of designated Roth contributions. issued final regulations on Sept. 23, 2019, most hadn't seen a rise in participants taking advantage of the new provisions, IRS Final Rule Eases 401(k) Hardship Withdrawals, Requires Amending Plans, IRS Clarifies Amendment Period for Final Hardship Withdrawal Regulations, President Biden's Immigration Plan Legalizes Millions of Undocumented Workers, Biden Administration Freezes Proposed and Pending Regulations, Virtual FLSA: Navigating the Fair Labor Standards Act, 2021 Appropriations Act Increases Employee Health Plan Transparency, Employees Still Perplexed by HSA Plans During Open Enrollment, Build Empathy into Your 2020 Open Enrollment Season. Section 1.401(k)-1(d)(3)(ii)). Six-Month Suspension Requirement Eliminated. The September 2019 final regulations addressed these concerns. New Rules for Hardship Distributions Employee Benefits Alert . $("span.current-site").html("SHRM China "); Final Hardship Distribution Regulations, Part Three: New Disaster Relief and Expanded Sources Available for Hardship Distributions By Paul M. Hamburger and Jennifer Rigterink on October 3, 2019 … Under the proposed regulations, effective January 1, 2019, a plan administrator has the option of including or excluding the requirement that the employee first obtain a plan loan prior to requesting a hardship distribution. On September 19, 2019, IRS finalized amendments to current 401(k) hardship withdrawal rules, implementing changes made by the Bipartisan Budget Act of 2018 (BBA 2018), providing a new and more flexible hardship withdrawal “safe harbor” and expanding the amounts that may be withdrawn from a 401(k) plan in a hardship withdrawal. The BBA’s changes to the hardship distribution rules apply to plan years beginning after Dec. 31, 2018. Regardless of the legal deadline for amending your 401(k) or 403(b) plan, however, it's advisable to amend plans. However, IRS expects administrators will be flexible with plan procedures when processing hardship distribution requests after a disaster. A hardship distribution cannot be rolled over into an IRA or another qualified plan. Effective January 1, 2020, following issuance of final regulations, certain changes will be required. FIS has developed a good-faith amendment that may be used to modify a plan to conform to the new hardship distribution rules set forth in 2019 final regulations applying Section 41114 of the Bipartisan Budget Act of 2018. Final Regulations. The purpose of this bulletin is to notify agencies/services that the Federal Retirement Thrift Investment Board (FRTIB) has implemented new withdrawal rules and processes for financial hardship in-service withdrawals as a result of the TSP Modernization Act of 2017. Hyperlinks added by SHRM Online. This publication is provided as a service to clients and friends of Harter Secrest & Emery LLP. Most Employers See No Rise in Hardship Requests. This publication is provided as a service … Revenue Procedure 2019-39, which the IRS issued on Sept. 30, 2019. Section 1.401(k)-1(d)(3)(iv)(E)), A hardship distribution may not exceed the amount of the employee's need. Let SHRM Education guide your way. Ensure that the plan's hardship withdrawal request forms include the new employee attestation requirement regarding lack of readily available funds to satisfy the hardship need. (Reg. In short, under Revenue Procedure 2020‑9, the amendment deadline is Dec. 31, 2021 for both pre-approved and individually designed 401(k) plans. Hardship distributions from a 401(k) plan were previously limited to the amount of the employee’s elective deferrals and generally did not include any income earned on the deferred amounts. © 2019 Miller Johnson. However, withdrawing money from any retirement plan should be a last resort. Mandatory and effective for hardship distributions … The rules for hardship distributions from 403(b) plans are similar to those for hardship distributions from 401(k) plans. Beginning January 1, 2020, plans can no longer require suspensions on contributions for participants who take hardship withdrawals. The Tax Cuts and Jobs Act of 2017 made several changes to the hardship withdrawal rules for 401(k) and 403(b) retirement plans. Previously, sponsors could suspend participants from making deferrals for 6 months after taking a hardship withdrawal. As you may be aware from our prior Top of Mind blog entry, the Bipartisan Budget Act of 2018 (more commonly known as the tax reform bill) changed a number of hardship distribution provisions, effective 1/1/2019, that would be applicable to all plans that permit distributions on account of hardship … Employers should explain to employees the process for resuming elective deferral contributions after the suspension is removed. 8. 2. (Code Section 72(t)(2)(E),(F)). However, certain distributions from an IRA that are used for expenses similar to those that may be eligible for hardship distributions from a retirement plan are exempt from the additional tax on early distributions. This should improve participants’ retirement security and make hardship distributions easier for retirement plans to administer. else if(currentUrl.indexOf("/about-shrm/pages/shrm-mena.aspx") > -1) { Employers should work with third-party administrators and recordkeepers to do the following: Recent Changes to Plan Amendment Deadlines. That’s right. Another option is to allow these 2019 suspensions to remain in place until they expire. The final regulations adopt the proposed regulations with few changes. Yes, changes to the hardship distribution rules for 401 (k) plans as a result of the Bipartisan Budget Act of 2018 will take effect for the 2019 plan year (e.g., as of January 1, 2019, for … Since … On September 19, 2019, the IRS issued final regulations updating the rules for hardship withdrawals from 401(k) plans. The need of the employee includes the need of the employee's spouse or dependent. If a 401(k) plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship. The 2019 Hardship Withdrawal Rules make it a little less difficult. Prohibit conditioning hardship distributions on or after January 1, 2020, on the suspension of elective and employee contributions. New “Safe Harbor” Hardship Withdrawal Rules Effective January 1, 2020 December 2019 The Internal Revenue Service recently issued final regulations governing “safe harbor” hardship … Plans are not required to offer hardship distributions. Consider amending the plan to align with the new changes. Under prior hardship rules, employees could not continue to defer money into the plan for six months after they took hardship distributions. Please enable scripts and reload this page. This new safe harbor expense is similar to relief given by the IRS after certain major federally declared disasters, such as the relief relating to Hurricane Maria and California wildfires provided in Announcement 2017-15, 2017-47 I.R.B. This new standard generally applies to hardship distributions made in plan years beginning on or after January 1, 2019, although the representation in item 3 (regarding insufficient resources) is not required for distributions prior to January 1, 2020. Under the provisions of the Pension Protection Act of 2006, the need of the employee also may include the need of the employee's non-spouse, non-dependent beneficiary. (Reg. Whether other resources are available is determined based on facts and circumstances. } Here are the most important changes: Previous safe harbor events continue to apply to hardship withdrawals. How does a participant show that he or she is experiencing a hardship? view Retirement Plan Hardship Withdrawals: New Rules for 2019 PDF. However, the amount required to satisfy the financial need may include amounts necessary to pay any taxes or penalties that may result from the distribution. July 2018 . However, hardships taken during 2019 that already have a suspension in progress would still apply the suspension until its expiration date, even if the expiration date is in 2020. $('.container-footer').first().hide(); There is generally no limit on when an IRA owner may take a distribution from his or her IRA, although there may be unfavorable tax consequences, such as an additional tax on early distributions. The reasons for taking a hardship … Thus, for example, a plan may provide that a distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and education expenses. (Reg. However, two changes were made: [SHRM members-only toolkit: Although the provisions are effective January 1, 2019, for calendar year plans, the proposed regulations do not require changes for 2018-2019. Plan operational changes still required by Jan. 1, 2020. Prior results do not guarantee a similar outcome. Please log in as a SHRM member. Eliminate the requirement that a participant take all available loans from the employer's plans before taking a hardship distribution. Effective for plan years starting after December 31, 2018, and subject to a plan amendment, if your plan allows hardship distributions, participants will be able to withdraw more of their account than previously allowed. (Reg. Prior to the issuance of the proposed regulations there were no special rules for hardship distributions on account of hurricanes or other natural disasters. Distributions. By Rebecca Moore. Please confirm that you want to proceed with deleting bookmark. These regulations primarily reflect changes made by the Tax Cuts and Jobs Act and the Bipartisan Budget Act of 2018 and are very similar to the regulations that the IRS proposed late last year.. What is the maximum amount of elective contributions that can be distributed as a hardship distribution from a 401(k) plan? The new rules, which were first proposed in 2018, affect several technical aspects of administering a hardship withdrawal. On Dec. 12, 2019, the IRS issued Revenue Procedure 2020-9, which simplifies the deadline to amend 401(k) plans for compliance with the final hardship regulations. Many of the changes are already effective, but certain mandatory provisions take effect Jan. 1, 2020. Although employers generally have until Dec. 31, 2021 to finalize plan amendments relating to the final hardship withdrawal rules, it is important to keep in mind the operational changes that are required by Jan. 1, 2020. Attorney Advertising. Page Last Reviewed or Updated: 15-May-2020, Request for Taxpayer Identification Number (TIN) and Certification, Employers engaged in a trade or business who pay compensation, Electronic Federal Tax Payment System (EFTPS), Webinars for Tax Exempt & Government Entities, Publication 547, Casualties, Disasters, and Thefts, Treasury Inspector General for Tax Administration, Retirement Plans FAQs regarding Hardship Distributions. New Hardship Distribution Rules for Your Company Retirement Plan Tina M. D'Agata (Feb, 2019) Employees may be able to dip into their company retirement plan monies to a greater degree given a new law that was passed in 2018. You can also keep the suspension for hardship distributions made all the way through 12/31/2019, but under the proposed regs it's not optional at all for hardship distributions after 12/31/2019. Section 1.457-6(c)(2)(ii)), A distribution on account of an unforeseeable emergency must not exceed the amount reasonably necessary to satisfy the emergency need. Employers that sponsor 401(k) plans that allow hardship withdrawals moved quickly last year to adopt the new, more liberal, rules. If your 401(k) plan made hardship distributions more than your plan allowed, find out how you can correct this mistake. Prior to 2019, employees and employers alike may have faced hurdles when wrestling with a hardship distribution. Revenue Procedure 2020-9, which the IRS issued on Dec. 12, 2019, establishes the deadline for amending 401 (k) plans to comply with the new hardship rules. Due to new laws, however, hardship distribution rules are changing in 2019. The area of most agreement among sponsors was the provision eliminating the post-withdrawal 6-month suspension of elective deferrals, with 60 percent of respondents indicating strong support for this change. Jeffrey T. Gray, an attorney in the Grand Rapids ;Mich., office of law firm Miller Johnson, represents public and private employers in employee benefits and executive compensation matters. The IRS flipped the script from requiring suspensions to prohibiting them. What employers need to know to implement the new hardship withdrawal regulations Lori Jones February 20, 2019. 1. Replace the facts-and-circumstances standard for dete… Earlier this year, Congress passed, and the President signed into law, H.R. Revenue Procedure 2020-9, which the IRS issued on Dec. 12, 2019, establishes the deadline for amending 401(k) plans to comply with the new hardship rules. Find answers to your COVID-19 vaccine questions here. 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