On September 23, 2019, the IRS published its final rule with respect to 401(k) hardship withdrawal requirements. The final rule articulates a new standard for hardship withdrawals that must be applied beginning in 2020. The relaxed standard requires employees to certify that they lack enough cash to meet their financial needs and the plan administrator to make a finding that the hardship withdrawal does not exceed the amount an employee needs. If the employee makes this certification, the plan administrators are permitted to rely upon it unless they have knowledge to the contrary. Employees must still first use other employer plan money, such as deferred compensation, if available, prior to seeking a hardship withdrawal.
The new rules also eliminate the requirement to impose a six-month contribution-suspension requirement after a hardship withdrawal has been received by a participant. This makes hardship withdrawals more appealing for participants; however, the rule change also makes it easier for participants to rebuild their retirement savings more quickly.
The rule adds a seventh hardship withdrawal safe harbor as well. Previously, hardship withdrawals could be obtained for: (1) purchase of a primary residence; (2) expenses to repair damage or make improvements to a primary residence; (3) prevention of eviction or foreclosure on a primary residence; (4) post-secondary education for the upcoming 12 months for the participant, the participant’s spouse or the participant’s children; (5) funeral expenses; or (6) medical expenses not covered by insurance. Now, participants can also establish an “immediate and heavy need” if the funds are used for expenses resulting from a federally-declared disaster area designated by FEMA.
Finally, plans may be amended to remove the requirement that a plan loan (if available) be taken by a participant prior to seeking a hardship withdrawal. This change is discretionary, meaning plan sponsors may choose whether or not they would like to amend their plans to include this provision.
Plans that permit hardship withdrawals must be amended to comply with the new requirements on or before December 31, 2019, and operational changes must begin no later than January 1, 2020.
What Does This Mean For You? If your 401(k) plan permits hardship withdrawals, you should contact your plan administrator or legal counsel to ensure that your plan meets the new requirements before December 31, 2019.
If you have any questions or concerns about this update, or any other employment or labor law questions, please contact Grace C. Nguyen Bond at firstname.lastname@example.org or (717) 509-7226.