Easier to Take Hardship Withdrawals
(Not so) easy to say no1
PSCA’s snapshot survey regarding hardship withdrawals pretty much confirms the data we regularly collect in our annual survey – 91.6% of survey responses confirm their plans offer liquidity in the form of hardship withdrawals and about 90% of those plans allow distributions for:
- The purchase of a primary residence;
- To prevent eviction or foreclosure;
- For post-secondary educational expenses; and
- For medical expenses and funeral expenses.
More than half of respondents also allow for distributions to satisfy financial needs following a natural disaster or to offset a casualty loss for damage to a principal residence.
As you may know, Congress liberalized the requirements for taking a hardship withdrawal from a 401(k) plan as part of the 2018 Bipartisan Budget Act. The changes are to take effect January 1, 2020. The timing of plan sponsors’ response has been modest; through September 30th, less than two-thirds of survey respondents made changes to comply with the new rules.
You have to wonder what Congress was thinking in making it easier to cash out more money from accumulated retirement savings – given the oft stated concerns about leakage and retirement preparation.2 For myself, this form of liquidity is nonsensical.3
Most plan sponsors amended their plans even where change was not mandatory - 65.1% eliminated the requirement to take plan loans before taking any hardship withdrawal, 59.6% expanded the assets available for hardship withdrawals to include earnings on 401(k) contributions, 37.6% to include Qualified Non-Elective Contributions (QNEC), and 30.3% to include Qualified Matching Contributions (QMAC). Further, 52.3% voluntarily expanded the list of reasons that qualify for a hardship distribution.
The survey results suggest that plan sponsors generally adopted the maximum liquidity possible, instead of attempting to manage pre-retirement, pre-separation access. The plan could have:
- Continued to require employees first obtain a plan loan prior to requesting a hardship distribution.4
- Continued to limit access solely to pre-tax contributions.5
- Limited the reasons that qualify for a hardship distribution.
Surprising to me, no respondent eliminated hardship withdrawals.6
Like parrots, most service providers, advisors, consultants, and plan sponsors may have unthinkingly implemented the new rules and may not have considered the impact increased leakage will have on retirement preparation.
1Three Dog Night, Easy to Be Hard. “Especially people who care about strangers … Easy to be hard … Easy to say no …” Accessed 11/26/19 at: https://www.youtube.com/watch?v=SrD14jqTtAE
2Government Accountability Office (GAO), 401(k) PLANS: Policy Changes Could Reduce the Long-term Effects of Leakage on Workers’ Retirement Savings, GAO-09-715, August 2009, Accessed 11/26/19 at: https://www.gao.gov/assets/300/294520.pdf See also: GAO, Additional Data and Analysis Could Provide Insight into Early Withdrawals, GAO-19-179, March 2019, Accessed 11/26/19 at: https://www.gao.gov/products/gao-19-179
3J. Towarnicky, Hardship Withdrawals – An Attractive Nuisance Becomes More Attractive, 2/9/18 Accessed 11/26/19 at: https://www.psca.org/blog_jack_2018_5 See also: J. Towarnicky, Cold Turkey Withdrawal, 11/26/18, Accessed 11/26/19 at: https://www.psca.org/blog_jack_2018_53
4Treasury Regulation §1.401(k)-1(d)(3)(iv)(E))
5Treasury Regulation §1.401(k)-1(d)(3)(ii))
6Treasury Regulation §1.411(d)(4) provides that curtailment or elimination of hardship withdrawals is not subject to anti-cutback limitations.