IRS Proposes Rules Altering the Hardship Distribution Requirements

November 28, 2018

On Nov. 14, 2018, the IRS published a proposed rule that changes the requirements that must be met for a participant to take a hardship distribution. The proposed rule incorporates some of the changes to hardship distributions that were made through congressional action (such as through the Tax Cuts and Jobs Act).

As background, the current 401(k) rules impose a number of limitations on participants seeking a hardship distribution. Namely, participants that take a hardship distribution can’t make elective deferrals to that 401(k) for a period of six months after receiving the distribution. They also must exhaust all available plan loans before taking a hardship distribution. Additionally, hardship distributions currently can’t be taken from earnings on elective deferrals, qualified matching contributions (QMACs) or qualified nonelective contributions (QNECs).

Among other things, this proposed rule modifies those requirements. Specifically, participants will be able to take a hardship distribution even if they have not exhausted all plan loans. They will also be allowed to continue contributing to their 401(k) after they take a hardship distribution. Likewise, the proposed rule would allow participants to draw hardship distributions from QMACs and QNECs (if their employer plan sponsor chooses to allow it).

In addressing the necessity of a given hardship distribution, the proposed rule would require participants to certify in writing or electronically that the participant has no other liquid assets available to satisfy the need for the hardship distribution.

Similar to other guidance, the proposed rule also extends the hardship relief necessary for participants that are victims of Hurricane Florence or Michael.

The rule would mostly become effective in plan years beginning after 2018. The elimination of the six month ban on elective deferrals must take place by 2020.

In summary, these rules encapsulate the recent congressional changes to 401(k) and 403(b) plans hardship distributions. Employers should familiarize themselves with these rules for hardship distributions.

Proposed Rule »