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PSCA Executive Reports

December 20, 2018

IRS Issues Much Anticipated Hardship Guidance

Plan sponsors and recordkeepers have been eagerly anticipating IRS guidance on changes to the hardship distribution rules made by the Bipartisan Budget Act of 2018 (the “Act”), which are effective for plan years beginning on or after January 1, 2019. These changes impact 401(k) plans that offer hardship withdrawals, which provide active participants the ability to receive their elective deferrals prior to reaching age 59-½. They also impact 403(b) plans, although those are subject to some different rules. Because current regulations under 401(k) regarding hardship withdrawals are now inconsistent with the statutory requirements under the Act, the IRS recently issued proposed regulations to conform the regulations to the new rules and to incorporate prior changes and guidance. 83 Fed. Reg. 56763 (Nov. 14, 2018).

The proposed regulations generally address: 

  1. The required elimination of the post-withdrawal suspension of elective deferrals, 
  2. The optional elimination of the requirement for participants to take plan loans first, 
  3. The ability to include additional plan account sources in hardship distributions, 
  4. Changes in the ability to qualify for a hardship distribution in the case of casualty losses and losses associated with federal disaster areas, and
  5. Changes in the administrative process required to document that a participant has demonstrated the requisite financial need.

Although the Act’s hardship withdrawal provisions are effective January 1, 2019 for calendar year plans, the proposed regulations do not mandate any operational changes for 2018-2019. Beginning January 1, 2020, following the likely issuance of the final regulations, however, certain changes will be required.


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