Denver companies that offer 401(k), 403(b) and other retirement plans will soon be required to comply with new hardship distribution rules. In September, the IRS issued final regulations which make it easier for plan participants to receive such distributions when the need arises. While no one plans to be in such a situation, it’s important to know retirement plan savings can be used to help resolve unforeseen circumstances. The new rules make several modifications which include ending the requirement to take a plan loan prior to a hardship distribution, relaxed hardship verification requirements and added natural disaster to the list of safe harbor events. To help clients, prospects and others understand the changes and impact on their plan, Hanson & Co have provided a summary of key changes below.
- 6 Month Contribution Suspension – Under the prior rules, when a participant took a hardship distribution their ability to make contributions was suspended for a period of six months. It was determined this rule discouraged participants from saving once they were able to recover. The good news is starting on January 1, 2020, plans will no longer be allowed to suspend contributions following a hardship distribution. This change will allow participants to make contributions and rebuild their savings sooner.
- Plan Loan Requirement – Under prior regulations, plan sponsors required a participant to take a plan loan, if available, prior to making a hardship withdrawal. The new regulations allow a plan to eliminate this requirement permitting the ability to make an immediate withdrawal. Unlike the prior change, this one is optional, so it’s up to the plan to determine if they want to implement it.
- Expanded Sources for Distributions – The final regulations change the number of funds eligible for a hardship distribution. Under the old regulations, participants were only allowed to withdrawal earnings and could not include profit sharing or bonus contributions. The new rules permit participants to include these contributions, and related earnings, regardless of when they were made. This is welcome news for many participants as it potentially increases the amount eligible to be taken.
- Hardship Verification Rules – Under prior rules, plan administrators had to consider all relevant information to determine if a hardship withdrawal was necessary. The new rules create one standard for determining need. The standard requires that the distribution amount cannot exceed the amount of need (which can include amounts necessary to pay taxes and penalties incurred), the employee must have obtained other available non-hardship distributions, and there must be adequate representation there are insufficient resources to satisfy the need. It’s important to note a distribution may not be made if the plan has knowledge the situation is contrary to the employee’s representation.
- Disaster Relief – The new regulations expand the qualifying situations under which a hardship distribution may be taken. Under the old rules, only an immediate and heavy financial need in the following situations qualified, including:
- Purchase of a primary residence
- Expenses to make repairs or improvements to a primary residence
- Funeral expenses
- Medical expenses not covered by insurance
- Preventing eviction or foreclosure from the primary residence
- Post-secondary education expenses for the upcoming 12 months (participants, spouses or dependents).
A new safe harbor category has been added allowing expenses from a federally declared disaster in an area designated by the Federal Emergency Management Agency (FEMA). This change makes it easier for those affected to gain access to desperately needed funds to mitigate unexpected situations.
Plan Compliance Deadline
Denver 401(k) and other retirement plans will need to be amended to reflect the changes before December 31, 2022. However, operational changes must be made by January 1, 2020, to ensure the new regulations are followed.
The new rules expand the benefits employees can receive when taking a hardship distribution. Concurrently, plans need to carefully review operations to ensure the necessary changes are made to stay in compliance. If there are questions about the new rules or if you need assistance with your 401k plan audit, Hanson & Co can help. For additional information please call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.