Skip to main content

EB Flash: IRS Issues Final Hardship Distribution Rules for 401(k) Plans

Employee Benefits Alert

The Internal Revenue Service (IRS) has issued final regulations that amend the rules relating to hardship distributions from 401(k) plans. 

The IRS explains that the final regulations update the Internal Revenue Code section 401(k) and section 401(m) regulations to reflect the enactment of sections 41113 and 41114 of the Bipartisan Budget Act of 2018; sections 826 and 827 of the Pension Protection Act of 2006; and section 105(b)(1)(A) of the Heroes Earnings Assistance and Relief Tax Act. The rules also address the application of the hardship distribution rules to reflect changes to the casualty loss deduction rules made by section 11044 of the Tax Cuts and Jobs Act.

In general, the regulation's major provisions would:

  • Modify the safe harbor list of expenses in existing §1.401(k)-1(d)(3)(iii)(B) for which distributions are deemed to be made on account of an immediate and heavy financial need, primarily to include expenses and losses, including loss of income, incurred by an employee (and not the employee's relatives or dependents) on account of a federally-declared disaster;
  • Modify the rules for determining whether a distribution is necessary to satisfy a need by eliminating (1) any requirement that an employee be prohibited from making elective contributions and employee contributions after receipt of a hardship distribution (i.e., the six-month suspension) and (2) any requirement to take plan loans prior to obtaining a hardship distribution (note that plans will be prohibited from continuing to apply the suspension provision but may continue to require an employee to first take any available loans);
  • Replace rules in existing §1.401(k)-1(d)(3)(iv)(B) for determining if a distribution is necessary to satisfy a financial need by continuing to require that the employee first take all other currently available distributions under the plan and adding that an employee represent that "he or she has insufficient cash or other liquid assets reasonably available to satisfy the need" (the preamble clarifies that these amounts would not include amounts earmarked for other purposes, such as rent);
  • Provide that the foregoing employee representation may be made in writing, by an electronic medium (such as telephonically), or in another form set forth by the IRS Commissioner;
  • Provide that a plan generally may provide for additional conditions, "such as those described in 26 CFR 1.401(k)-1(d)(3)(iv)(B) and (C) to show that a distribution is necessary to satisfy an immediate and heavy financial need of an employee." As noted above, the final regulations prohibit plans from suspending elective or employee contributions as a condition of obtaining a hardship distribution; and
  • Modify existing §1.401(k)-1(d)(3) to allow hardship distributions from 401(k) plans of elective contributions, corrective qualified nonelective contributions (QNECs), corrective qualified matching contributions (QMACs), and earnings on these amounts, regardless of when contributed or earned.

The final regulations are effective for distributions no later than January 1, 2020. Generally it appears that amendments will be required by December 31, 2021, although it's possible that an earlier deadline may apply in some cases.

The 36-page text of the final regulations is posted here.

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

This, and related communications, are protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices, and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this presentation without prior written consent of the copyright holder.