2019 Changes to Hardship Withdrawal Rules

January 4, 2022

On November 14, the IRS published proposed regulations pertaining to hardship distributions, as a consequence of recent legislative changes including those in the Bipartisan Budget Act of 2018.

A hardship distribution is an optional feature within a 401(k) plan, so your plan may or may not allow for hardship distributions. Employees must demonstrate their financial hardship, and meet other requirements, some of which will be simplified as early as January 2019.

The most significant provisions addressed in the proposed regulation include:

401(k) hardship administration changes

  • The elimination of the requirement that a plan loan must be taken in advance of a hardship distribution (effective beginning January 1, 2019).
  • The elimination of the six month suspension of elective deferrals as a condition of obtaining a hardship distribution.
  • Plans may expand the maximum amount available for hardship to include employer matching and employer non-elective contributions (QMACs and QNECs) and earnings.

There are additional regulatory changes that should reduce paperwork, such as simplifying the demonstration of need for a hardship distribution. Medical, educational, and funeral expenses for the primary beneficiary of the employee would be considered in demonstrating a financial hardship.

Impact on 403(b) Plans

403(b) plans are generally subject to the 401(k) hardship rules, however earnings on 403(b) deferrals will remain ineligible for distribution on account of hardship.

Plan Amendments Necessary Later

The IRS cautioned that these provisions would require a plan amendment. This deadline will be two years after the changes within final regulations are added to the annual IRS Required Amendments List.

For additional detailed information on the Hardship Withdrawal Regulations visit our website click on the “NEWS” link.

If you have any questions about how these proposed regulations will affect your plan, please contact your Centurion Group consultant.