Qualified retirement plans including 401(k) plans, 403(b) and 457(b) plans may, but are not required to, allow hardship distributions from the plan upon certain events, such as an immediate and financial need to pay medical or funeral expenses, purchase of a principal residence, or payment of tuition and education expenses.  If a plan permits a hardship distribution, it must provide the specific criteria to determine the actual hardship.

The Bipartisan Budget Act of 2018 eased the criteria for certain hardship distribution rules.  The IRS subsequently released proposed regulations in November, 2018 to implement these changes.  Final regulations were published on September 23, 2019.  These final regulations:

1. Modify the safe harbor list of expenses and distributions that are deemed to be made for an immediate and heavy financial need by:

• Adding "primary beneficiary under the plan" as one for whom qualifying medical, educational, and funeral expenses may be incurred;
• Including expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction IRC Section 165; and
• Including loss of income as a result of a FEMA-declared disaster that occurs in the area of the employee’s principal residence his/her principal place of employment.

2. Modify the rules for determining whether a distribution is necessary to satisfy an immediate and heavy financial need by eliminating the requirement that prohibits participants from making elective contributions and employee contributions for at least six months following receipt of the hardship distribution.  Further, a participant need not take all available plan loans prior to taking a hardship distribution.
3. Permit hardship distributions to be taken from elective contributions, qualified nonelective contributions (“QNECs”), qualified matching contributions (“QMACs”), together with earnings on such amounts, regardless of when contributed or earned.

Effective date.  Generally, the rules become effective for hardship withdrawals made on or after January 1, 2020 for plans adopting such changes.  However, plan sponsors may amend their plan to retroactively apply these changes for distributions made on or after January 1, 2018.

The information contained in this article is provided as general guidance and may be affected by changes in law or regulation. This article is not intended to replace or substitute for accounting or other professional advice. Please consult a CBIZ professional. This information is provided as-is with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.