PLANSPONSOR - February - March 2022 - 16

UPFRONT
A 'Snapshot' of Updated Hardship Rules
THE RULES for participant hardship
withdrawals from 401(k) and 403(b) plans
have changed since the passage of the
Bipartisan Budget Act of 2018 and with
subsequent IRS regulations. The IRS,
therefore, has updated its " Issue Snapshot
- Hardship Distributions from 401(k)
Plans " to reflect those changes.
The Budget Act called for the secretary
of the Treasury to amend then-current
regulations to delete the six-month prohibition
on contributions to a plan following
a hardship withdrawal. The act also permitted
hardship withdrawals to include
contributions made to a profit-sharing
or stock bonus plan, qualified nonelective
contributions and qualified matching
contributions; earnings on the contributions
were also now allowed. Subsequent
IRS regulations clarified, however, that
" income attributable to Section 403(b)
elective deferrals continues to be ineligible
for distribution on account of hardship. "
The act also said, " A distribution shall
not be treated as failing to be made upon
the hardship of an employee solely because
the employee does not take any available
loan under the plan " -in other words, a
sponsor could permit participants to take
a hardship distribution without borrowing
against their plan account first. These
rules said they amend Section 401(k) of the
Internal Revenue Code and subsections
under that. They became effective for plan
years beginning after December 31, 2018.
Under the act, sponsors may choose
to ignore the provision allowing hardship
withdrawals before loans, as it is optional.
And 401(k) plan sponsors may limit the
type of contributions available for hardship
distributions and whether earnings
on those contributions may be drawn from.
However, removing the six-month
suspension of elective deferrals is mandatory
for hardship distributions made on or
after January 1, 2020; since that date, plan
sponsors have not been free to retain this
provision.
The Issue Snapshot also covers
changes to the safe harbor list of
expenses for which distributions are
deemed to be made on account of an
immediate and heavy financial need.
The list now includes " primary beneficiary
under the plan " as an individual for
whom qualifying medical, educational
and funeral expenses may be incurred; it
also says damage to a principal residence
that would qualify for a casualty deduction
under IRC Section 165 does not
have to be in a federally declared disaster
area; and it added a new type of expense,
relating to costs incurred as a result of
certain disasters.
In addition, the IRS regulations
simplified the rules for determining
whether a distribution is necessary in
order to satisfy a particular financial need.
Instead of requiring a judgment based on
all of the relevant facts and circumstances,
the agency now has one general standard
it applies. -Rebecca Moore
16 PLANSPONSOR.COM February - March 2022
Art by Ryan Garcia
http://www.PLANSPONSOR.COM
PLANSPONSOR - February - March 2022

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