IRS Finalizes Hardship Distribution Rules

October 1, 2019

On September 23, 2019, the IRS published the final rule changing the requirements that must be met for a participant to take a hardship distribution. As background, the IRS proposed new rules for hardship distributions back in November 2018 (as discussed in our November 28, 2018, Retirement Update for Compliance Corner).

The final rules are very similar to the proposed rules. As such, 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 qualified matching contributions and qualified nonelective contributions (if their employer plan sponsor chooses to allow it).

There were a few clarifying changes to note:

  • The safe harbor for expenses incurred due to federally declared disasters has been updated to make it clear that employees can only receive a hardship distribution for their own losses, and not for the losses of their relatives or dependents. It also clarifies that there is no deadline for requesting a distribution and that there is no extended deadline for employers that want to adopt disaster-related hardship provisions.
  • The funds that are available for hardship distributions can include safe harbor contributions.
  • Participants can apply for a hardship distribution as long as the distribution is necessary to satisfy the participant’s financial need. They can do so even if they have access to funds that will be needed for another purpose soon. They can certify this need by telephone.

With some exceptions, the final regulations apply to distributions made after January 1, 2020. However, parts of the rule have been in effect since January 1, 2018.

Employers offering hardship distributions should determine how this rule will affect their plan and discuss these final rules with their advisor.

Final Rule on Hardship Distributions »