Employers sponsoring qualified retirement plans that allow for hardship distributions need to be aware of regulatory changes and likely need to amend their plan document. On December 4, 2019, the Internal Revenue Service (IRS) issued the 2019 Required Amendments List, which included amendments relating to the final hardship distribution regulations issued on September 23, 2019. Plan sponsors should be aware of both the optional and required operational changes for hardship distributions, as well as the amendment and effective dates for documenting those changes.
The following changes are required and must be operationally effective on January 1, 2020. However, these changes could be operationally effective as early as January 1, 2019.
- Plans can no longer require participants to suspend deferrals to take a hardship distribution.
- Plans must require employees to self-certify that the employee has no alternative funds “reasonably available” to satisfy the financial need. Plan administrators can rely on such self-certification absent actual knowledge to the contrary. This requirement is part of the new 3-factor test to determine whether a distribution is necessary to satisfy a financial need, which replaces the prior facts and circumstances test. The other two requirements are that the hardship cannot exceed the participant’s financial need and the employee must first obtain other available distributions from all plans maintained by the employer, excluding loans and hardship distributions.
The following changes that relate to plans utilizing the hardship safe harbor for demonstrating an immediate and heavy financial need are optional and could be operationally effective as early as January 1, 2018:
- A new safe harbor category of expenses that are deemed to be an immediate and heavy financial need includes expenses and losses due to a federal disaster declared by FEMA.
- The safe harbor category relating to casualty losses to a principal residence is not limited to damage due to a federally declared disaster.
- Safe harbor categories relating to medical expenses, tuition and educational expenses, and funeral expenses are expanded to encompass expenses for a “primary beneficiary under the plan.”
The following changes are also optional and could be operationally effective as early as January 1, 2019:
- Plans no longer have to require employees to first take plan loans before seeking a hardship distribution.
- For 401(k) plans, accounts holding earnings on elective deferrals, QNECs, and QMACs (including safe harbor contributions) are now eligible for hardship distributions. For 403(b) plans, the final regulations only permit distribution on account of hardship from custodial accounts (not non-custodial accounts or earnings on elective deferrals).
- 401(k) plans: Plan sponsors of 401(k) plans must amend plan documents to account for required amendments by December 31, 2021. This deadline applies to all amendments made as a result of the final hardship regulations, whether discretionary or required.
- 403(b) plans: Plan sponsors of 403(b) plans must adopt the required amendments by March 31, 2020, the remedial amendment deadline.The IRS has indicated this deadline may possibly be extended in future guidance.
Remember, plans must still operate in conformance with the required changes beginning January 1, 2020.
Other recommended actions
Plan sponsors of safe harbor plans should also review their safe harbor notice and determine whether it needs to be updated, and all plan sponsors should consider when to distribute a summary of material modifications or updated summary plan description reflecting the changed plan operations, even if the amendment has not yet been adopted.
Plan sponsors should ensure that all plans operationally conform to the required changes beginning January 1, 2020, making sure that the necessary plan amendments for those required changes as well as any discretionary changes are adopted by December 31, 2021 (on March 31, 2020 for 403(b) plans).