Budget Act Changes Hardship Regulations

President Trump signed into law the Bipartisan Budget Act of 2018 (“Budget Act”) on February 9th of 2018. The Budget Act includes several provisions affecting hardship withdrawals that become effective for plan years beginning on or after January 1, 2019:

Elimination of Six-Month Contribution Suspension. Under current Internal Revenue Service (IRS) regulations, a plan participant is permitted to take a hardship distribution only if the distribution is necessary to satisfy an immediate and heavy financial need. The regulations include a “safe harbor” under which a distribution will automatically be treated as meeting this requirement if, among other things, the participant’s right to contribute to the plan is suspended for at least six months after the hardship withdrawal. The Budget Act directs the Secretary of the Treasury to modify the regulation to delete the six-month contribution prohibition from the safe harbor.

Expansion of Hardship Withdrawal Sources. The Budget Act expands the sources of contributions under a 401(k) plan that may be accessed for hardship withdrawals. The sources now include earnings on elective deferrals, safe harbor contributions, “qualified non-elective contributions” and “qualified matching contributions” (i.e., contributions plan sponsors can make to remedy a plan’s failure to pass nondiscrimination testing) and earnings on such contributions.

Elimination of Requirement to Take Loans. The Budget Act eliminates the requirement that a participant take all available loans under the plan as a condition to receiving a hardship distribution. Further guidance from the IRS is needed interpreting the Budget Act provisions and implementing the directive to remove the suspension provision from the safe harbor definition. There are several unanswered questions relating to the implementation of the revised regulations, not the least of which is what may apply to participants who are suspended when the new regulations take effect.

In the meantime, service providers are developing solutions to accommodate the revised regulations while awaiting further guidance and will notify our clients when such guidance is issued.

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