The Department of Treasury has finalized new rules on hardship withdrawals from defined contribution plans that were laid out in the Bipartisan Budget Act of 2018.
Last November, Treasury issued proposed new hardship regs. “The final regulations are substantially similar to the proposed regulations, and plans that complied with the proposed regulations will satisfy the final regulations,” according to the final rule, which is scheduled for official publication in the Federal Register on September 23.
Under the new reg, hardship withdrawals can be extended to include a plan participant’s named primary beneficiary for qualifying medical, educational, and funeral expenses.
The safe harbor list for qualifying expenses is extended to home damages participants suffer in areas of natural disaster. Hardship withdrawals for disaster-related expenses will only be available to the affected plan participant, and not a participant’s relatives or dependents. That provision is different from the relief Treasury has traditionally offered to plan participants in disaster areas, which allows distributions for family members of savers.
Under Treasury’s disaster-relief announcements, participants have a hard deadline by which to make withdrawal claims. Under the new regulation, there is no such deadline.
By adding disaster relief to the qualifying events under the safe harbor, regulators intend to eliminate any delay or uncertainty over access to plan funds. Going forward, Treasury says it does not expect to issue disaster-relief announcements for affected retirement savers.
The new regulation also removes the previous 6-month prohibition on payroll deferrals after a hardship withdrawal is taken. Under the amendments to the tax code, participants will not be required to exhaust plan loan options before requesting a hardship withdrawal.
Going forward, hardship withdrawals can be made from a participant’s elective contributions, and the matching contributions from employers, including the earnings on the savings.
Previously, only the employee-share of savings could be tapped. Individual plans may, however, limit participants from drawing down savings from employer contributions.
The new rules on withdrawals of elective distributions also apply to 403(b) plans.
The updated regulations apply to distributions made on or after January 1, 2020, but those made subsequent to passage of the Bipartisan Budget Act of 2018 can also apply under the new regulations.
As was the case before the amendments in the final regulation, a hardship distribution must be used for “an immediate and heavy financial need,” according to an IRS fact sheet.
But the plan participant must not have other available resources, such as, for instance, a vacation home. The distribution amount must not exceed an employee’s need. That need can include taxes or penalties that result from the distribution.
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