IRS Relaxes Rules Restricting Hardship Withdrawals from 401(k) Retirement Plans by Adam Slavin, CPA
Posted on April 30, 2019 by Adam Slavin
Thanks to the Bipartisan Budget Act of 2018, workers confronted with an “immediate and heavy” financial burden are finding it far easier to take hardship withdrawals from their employer-sponsored 401(k) and 403(b) plans beginning this year.
Effective Jan. 1, 2019, sponsors of defined contribution retirement plans may no longer require participants seeking early withdrawals of retirement funds to first take out a 401(k) plan loan, which requires timely repayment of the borrowed amount plus interest and a potential lump sum repayment upon termination of the participant’s employment or departure from the company. In addition, plan participants are no longer required to wait six months after receiving a hardship distributions to resume salary deferral contributions to the plan. This allows them to immediately begin rebuilding their savings after a hardship withdrawal.
In addition, the IRS is allowing plan sponsors the option to distribute as hardship withdrawals earnings on 401(k) and profit sharing contributions as well as qualified non-elective contributions (QNEC) and qualified matching contributions (QMAC) and the earnings on those contributions. This decision provides employers with the flexibility to decide what type of contributions they make available for hardship withdrawals while allowing them to preserve the retirement benefits of all of their plan participants.
Beginning on Jan. 1, 2020, 401(k) sponsors must make it easier for plan participants to demonstrate their need for a hardship withdrawal by simply requiring them to provide a written statement explaining that that they do not have enough cash or liquid assets to satisfy an “immediate and heavy financial need.” In addition, sponsors must expand the definition of financial need to include the financial needs of participants’ spouses, children and primary beneficiaries named on their accounts as well as the expenses and losses participants and their primary beneficiaries incur to their principle residences or places of business as a result of the federally declared disaster.
Complying with the new regulations requires employers to amend their plan documents and communicate these changes to participants by Jan. 1, 2020. In addition, employers should note that despite these relaxed rules, they must maintain appropriate records documenting hardship withdrawal requests, reviews and approvals.
About the Author: Adam Slavin, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practices, where he provides tax planning and consulting services to high-net-worth individuals and closely held business. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at firstname.lastname@example.org.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.