PLANSPONSOR - December 2018/January 2019 - 12

Rules & Regulations
Amendments Proposed for
Hardship Withdrawal Regulations
401(k) plan sponsors using the IRS safe
harbor list of expenses for which they
can grant hardship distributions may
want to pay extra attention to the agency's
mid-November notice of proposed
rulemaking. The amendments proposed
therein reflect statutory changes
affecting 401(k) plans. They also include
recent changes made by the Bipartisan
Budget Act of 2018, which directs the
IRS to release regulations that formalize
changes Congress has approved.
Specifically, the proposed regulations
modify the list of safe harbor
expenses found in Internal Revenue
Code (IRC) Section 1.401(k)-1(d)(3)(iii)(B)
for which participants may take a distribution
to cover immediate and heavy
financial need. The modifications:
* Add " primary beneficiary under
the plan, " referring to an individual for
whom qualifying medical, educational
and funeral expenses may be incurred;
* Clarify that a principal residence
that sustains damage does not have to
be in a federally declared disaster area
to qualify for a casualty deduction under
IRC Section 165; and
* Add to the list a new type of
expense resulting from certain disasters
designated by the Federal Emergency
Management Agency (FEMA).
Jodi Epstein, a partner at Ivins,
Phillips & Barker, notes that, under
the Bipartisan Budget Act, allowable
deductions under Section 165 had been
limited exclusively to damage to a principal
residence in a federally declared
disaster area, which meant that " if a tree
fell on your house in a federally declared
hurricane disaster, it would be covered,
but if it fell on your house because of a
bad storm, it wouldn't, " she says. The
from making elective or employee contributions
after receiving the distribution. It
would also eliminate any requirement that
a participant take a plan loan before qualifying
to take a hardship distribution.
Further, the proposed regulations
" ... if a tree fell
on your house
in a federally
declared
hurricane
disaster, it would
be covered, but
if it fell on your
house because
of a bad storm,
it wouldn't. "
IRS proposal restores the previous rule,
which allows for hardship withdrawals
to cover damage to a principal residence
regardless of the cause.
The proposed regulations also would
eliminate the contribution moratorium, or
any prohibition stopping the participant
10 PLANSPONSOR.com December 2018 - January 2019 Art by Enan Liang
eliminate the rules requiring the determination
to be made based on all of the
relevant facts and circumstances. Instead,
the proposal gives one general standard
for making the assessment. Under this
general standard, a hardship distribution
may not exceed the amount of an
employee's need. Covered might also be
the cost of federal, state or local income
taxes, or penalties reasonably anticipated
to result from the distribution. However,
the employee must have first obtained all
other available distributions under his
employer's plan and must represent that
he has insufficient cash or other liquid
assets to satisfy the financial need.
A plan administrator may rely on
such a representation unless having
actual knowledge to the contrary.
As to the contributions a 401(k)
participant would be able to draw against
when taking a hardship distribution, these
would include elective contributions, qualified
nonelective contributions (QNECs)
and qualified matching contributions
(QMACs), plus earnings on these amounts
regardless of when contributed or earned.
Still, a plan could limit the type of
contributions that could be used and
whether earnings on those would be
included. Safe harbor contributions made
to a plan described in Section 401(k)(13)
may also be distributed on account of
an employee's hardship, because these
contributions would be subject to the
same distribution limitations applicable
to QNECs and QMACs.
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