The Internal Revenue Service recently issued final regulations governing "safe harbor" hardship withdrawals from Section 401(k) plans. The regulations are effective for distributions made on or after January 1, 2020 and reflect statutory changes and both a liberalization and simplification of existing IRS regulations. In this Benefits Brief, we will provide an overview of the hardship rules, summarize the key changes made, and highlight the actions needed in defined contribution plans that permit hardship withdrawals.1
Hardship Withdrawals Generally
Distributions of elective deferrals, qualified matching and qualified nonelective contributions, and safe harbor matching and nonelective contributions ("restricted contribution sources") from a Section 401(k) plan cannot generally be made earlier than a participant's termination of employment or attainment of age 59 ½. An important exception to that rule permits withdrawals of amounts on account of an immediate and heavy financial need of a participant and certain related parties where the distribution is necessary to satisfy the financial need.
Profit sharing plans without Section 401(k) features and employee stock ownership plans may also permit hardship withdrawals and generally have more flexibility than Section 401(k) plans with restricted contribution sources in how hardship withdrawals are determined. Likewise, the contribution sources in Section 401(k) plans other than restricted contribution sources are subject to less strict hardship withdrawal rules. Despite that flexibility, most defined contribution plans with hardship provisions follow the Section 401(k) hardship rules described below.
1 Plan sponsors could voluntarily elect to apply the provisions of the proposed hardship regulations starting in the 2019 plan year. A discussion of those rules and the action items needed by plan sponsors who did so is beyond the scope of this Benefits Brief.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.