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December 19, 2018

IRS Relaxes Hardship Withdrawal Rules for Not-for-Profits (article)

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Recently, the IRS made several changes to the rules related to hardship withdrawals for not-for-profit organizations. The changes may be adopted by plan sponsors as early as Jan. 1, 2019 or, if later, the first day of the plan year beginning after Dec. 31, 2018.

Hardship withdrawals allow participants to take a distribution from their 403(b) plan while they are employed if they meet certain financial hardship conditions. The plan document must permit hardship withdrawals and specify any limitations.

The changes in the rules make it easier for an employee to access their 403(b) account in the event of a financial hardship. The changes are highlighted below:

  • The six-month suspension requirement for employee deferrals following a hardship withdrawal is removed
  • The requirement that an employee take a participant loan to the extent possible prior to taking a hardship withdrawal is removed
  • Sources available for hardship withdrawals are expanded beyond salary deferrals to include safe harbor contributions, qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs), unless these amounts are held in a custodial account
  • Hardship withdrawals are allowed for expenses related to a federally declared disaster
  • Clarification that damage to a participant’s primary residence qualifies for a hardship withdrawal even if it is not due to a federally declared disaster

Employers may, but are not required to, adopt these changes. The six-month suspension of employee deferrals, however, may not be retained past Dec. 31, 2019.

Employers should consider whether or not to adopt these new rules. The rules may be implemented on the first day of your next plan year, although plan sponsors have until at least Dec. 31, 2021 to amend their plan.

Since there are several options, it is recommended that you discuss your alternatives with your plan document provider and include these new provisions in your written administrative procedures. It is important that your plan amendment accurately reflect the provisions as they have been applied, including the effective dates of the new provisions as they have been applied to your plan.

For assistance or questions related to hardship withdrawals, or any other retirement plan issues, please contact us.

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Copyright © 2018, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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