Hardship Withdrawal Limitations
In the past years, the SECURE Acts have expanded the hardship distribution rules to allow plan participants to take hardship withdrawals for multiple reasons. Additionally, the SECURE Act 2.0 provided that plans that allow hardship distributions may rely on the employee's certification as to the existence of the hardship and the amount needed. Previously, it was only clear that the employer was permitted to rely on the employee's certification about the lack of cash or other liquid assets needed to address the hardship. Some have questioned this trend and expressed concern that the expansions will result in increased retirement plan leakage.
We asked two professors and authors of Tax Facts with opposing political viewpoints to share their opinions about whether retirement plan sponsors should limit hardship withdrawals.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Bloink: Retirement plan leakage via hardship distributions is a real and serious concern. Employers must be aware of the reality that some plan participants don't really take the need to save for retirement seriously and instead use their retirement funds as general savings. Plan sponsors should be focused on educating plan participants about the pitfalls of using the hardship distribution rules to access their retirement accounts for to provide general cashflow.
Byrnes: The law allows hardship withdrawals for multiple purposes and does not itself impose a limit. Plan participants should be entitled to manage their money as they see fit--and it's not up to the employer to impose their own requirements that limit the participants' ability to make their own financial decisions regarding legitimate and legal options that have been blessed by Congress.
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Bloink: Employers can now allow employees to self-certify when they take a hardship distribution--but should they really? The reality is that self-certification essentially allows the employee to access their retirement savings for any purpose whatsoever. Yes, it makes matters easier for the plan sponsor, but in the end, self-certification doesn't really benefit the employee if we're considering the goal of maximizing retirement savings in the long run.
Byrnes: Sure, education about additional options and the purpose of retirement savings is valuable. That doesn't mean that employers should limit the participants' ability to make use of the otherwise available hardship distribution rules. The purpose of educating retirement plan participants should be to allow those individuals to make their own decisions with respect to managing their money.
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Bloink: Some employees only contribute to take advantage of the employer matching contribution and then elect to take a hardship distribution--essentially manipulating the employer matching rules without really saving anything on their own for retirement. Plan sponsors should absolutely limit the ability of participants to take hardship distributions without clear documentation that they are experiencing a real and significant hardship that cannot be remedied through other means.
Byrnes: The fact is, some plan participants have multiple hardships in a single year or maybe even experience qualifying hardships each year. That's why we have the hardship distribution rules. If we didn't, employees would be discouraged from saving anything at all. When plan participants know they won't have access to their hard-earned dollars when they need it, they're going to be discouraged from using the retirement savings vehicle in the first place.