Congress Enacts Changes to Hardship Withdrawal Rules
Posted on March 1, 2018 by Legacy Retirement Solutions
The recently enacted Bipartisan Budget Act of 2018 (“Budget Act”) included some unanticipated provisions that directly affect retirement plans. One such provision relates to the availability and amount of hardship withdrawals made under 401(k) plans. The following summarizes the impact of these new rules.
Before we discuss the impact of the changes implemented by the new law, it is important to understand that these changes will not become effective until 2019. More specifically, the new rules may only be applied with regard to plan years that begin on or after December 31, 2018. Therefore, it is not yet possible to implement these rules. In addition, most retirement plans will need to be amended in order to take advantage of these changes. Thus, please accept this article as only a starting point from which to consider the future design of your retirement plan. Also, before attempting to implement this or any design changes to your retirement plan, be sure to carefully and thoroughly discuss it with your retirement plan service providers and professionals in order to ensure that you do so in a compliant fashion.
With those words of caution, one change imposed by the Budget Act is to expand the money sources from which a hardship withdrawal may be obtained. Although previously prohibited, the Budget Act states that hardship withdrawals may be made from qualified nonelective contributions (“QNECs”), qualified matching contributions (“QMACs”) and the earnings associated with those amounts. The Budget Act also expanded permissible sources for hardship withdrawals to include earnings on elective deferral contributions. This expansion will allow participants to obtain hardship withdrawals from QNECs and QMACs that some plan sponsors make in order to pass nondiscrimination testing. However, the real impact of this expansion is likely to be associated with allowing hardship withdrawals from QNECs that are contributed to 401(k) plans in satisfaction of safe harbor 401(k) employer contribution obligations.
Another change imposed by the Budget Act was to instruct the Treasury Department to eliminate the regulatory requirement that participants be suspended from making elective deferral contributions for a period of at least six months after receiving a hardship withdrawal. This change will allow participants to continue to save a portion of their wages or salary towards their retirement even after obtaining a hardship withdrawal.
Finally, existing Treasury regulations indicate that a hardship withdrawal should only be granted if it is necessary to satisfy an immediate and heavy financial need. In general, in order for the withdrawal to qualify as “necessary” in this context, the participant must first take any loans that may otherwise be available to him or her under the terms of any of the retirement plans of his or her employer. In this regard, the Budget Act indicates that a hardship withdrawal will not fail to be permissible merely because a participant does not first take an available loan from the plan.
We hope that this article helped you to better understand this topic. However, please be advised that it is not intended to serve as financial, tax or legal advice so it should not be construed as such. If you have questions about this topic or are considering implementing these rule changes, we strongly urge you to further discuss it with a qualified retirement plan professional. For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.