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Benefits

IRS Makes Few Changes in Final Version of IRS Hardship Distribution Regulations

EBIA  

EBIA  

Hardship Distributions of Elective Contributions, Qualified Matching Contributions, Qualified Nonelective Contributions, and Earnings, 84 Fed. Reg. 49651 (Sept. 23, 2019)

Available at https://www.govinfo.gov/content/pkg/FR-2019-09-23/pdf/2019-20511.pdf

The IRS has finalized its changes to the 401(k) plan regulations governing the events that constitute qualifying hardships, the funds available for hardship distributions, and the standards used to determine whether those funds are needed to relieve a participant’s hardship. The changes reflect amendments made by the Bipartisan Budget Act of 2018 (BBA) (see our Checkpoint article) and other laws. The final regulations are substantially similar to the proposed regulations (see our Checkpoint article), but a few clarifications appear in the regulations and preamble. Here are highlights:

  • Disaster-Related Hardships. The preamble confirms that the new safe harbor for expenses and losses incurred on account of a federally declared disaster differs from previous disaster-specific relief. The safe harbor applies only to expenses and losses of an employee whose principal residence or place of employment was within the area designated for individual relief; it does not apply to losses of relatives and dependents. Furthermore, the safe harbor sets no deadline for requesting a distribution, and it does not expressly authorize relaxing procedural requirements (although the IRS assumes that plan terms will be interpreted flexibly in the context of a disaster). Finally, there is no extended deadline for adopting disaster-related hardship provisions if they are not adopted as part of a plan amendment reflecting the final regulations. The IRS expects that the new safe harbor will make relief announcements for future disasters unnecessary, but it is considering extending the amendment deadline for plans that postpone adding the new safe harbor until a particular disaster. (That extension might also apply to new plan loan provisions added in response to a disaster.)
  • Funds Available. In response to comments, the preamble affirms that the funds available for hardship distributions may include safe harbor contributions under Code §§ 401(k)(12) and (13). But plans may choose to limit the contributions and earnings that are available for hardship distributions.
  • Participant Representation. Like the proposed regulations, the final regulations establish one general standard for determining that a distribution is necessary to satisfy a participant’s financial need. Under the final regulations, however, participants must represent that they have insufficient cash or other liquid assets “reasonably available” to satisfy the need, a standard that could be met even if the participant has funds that will soon be needed for another purpose (e.g., rent). The regulations also clarify that a participant’s telephonic representation is acceptable.
  • Suspensions. The final regulations have been revised to provide a list of the qualified plans and other arrangements that cannot suspend contributions due to a hardship distribution. That list intentionally omits certain nonqualified deferred compensation arrangements. Also, the IRS has clarified that if matched employee (after-tax) contributions are distributed “in conjunction with” a hardship distribution of elective deferrals, suspension of employee contributions is not permitted.
  • Applicability Dates. While the final regulations apply to distributions made on or after January 1, 2020, they may be applied to distributions in plan years beginning after 2018, and suspensions may be eliminated from the first day of the first plan year beginning after 2018 even if the hardship distribution occurred earlier. Also, the list of distributions that are deemed to be a qualifying need under the final regulations can be used as early as January 1, 2018. If the final regulations are applied to distributions before 2020, the requirements relating to employee representations and the prohibition of suspensions may be disregarded as to the pre-2020 distributions.
  • Plan Amendments. According to the preamble, all of a plan’s amendments relating to the final regulations—i.e., required amendments and integrally related amendments effective no later than the required amendment—will have the same amendment deadline as determined by Rev. Proc. 2016-37 (see our Checkpoint article). For example, if the required amendments are included in the required amendments list for 2019, the deadline for required amendments and all integrally related amendments (including those with an earlier effective date) for an individually designed, nongovernmental plan will be December 31, 2021. Employers using preapproved plans have until the deadline for their interim amendments required by the final regulations to adopt interim amendments integrally related to the final regulations. Thus, a preapproved plan that implemented the prohibition on suspensions in 2020 could use the required amendment deadline (the tax-filing deadline plus extensions for 2020) as the deadline for an interim amendment that added new safe harbor expenses (which the plan could have implemented as early as 2018).

EBIA Comment: According to the preamble, any plan that has complied with the proposed regulations will satisfy the final regulations. Thus, some plans may have little more to do as a result of these final regulations, apart from timely finalizing plan amendments. We note that the final regulations sometimes refer to the pre-amendment regulations as “revised as of April 1, 2019.” This date refers to the version of the relevant portion of the Code of Federal Regulations that will be used to determine compliance by plans that do not implement the final regulations for pre-2020 distributions. For more information, see EBIA’s 401(k) Plans manual at Sections XV.B (“Safe Harbor Events Deemed to Be Financial Hardships”), XV.D (“Safe Harbor Standards Deeming Lack of Other Resources”), XV.H (“Special Hardship Rules for Disaster Relief”), XXVII.E (“Amendment Timing”), and XXVII.G (“Extended Remedial Amendment Periods”).

 

Contributing Editors: EBIA Staff.

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