After much anticipation, the IRS has issued proposed regulation related to the changes in law made by the Budget Act and the Tax Cuts and Jobs Act (see articles:  ). These laws relaxed certain constraints on hardship distributions for plan years beginning after January 1, 2019 and questions remained regarding timing and administration of these new rules.
Under the proposed regulations, the IRS clarified the following:
- Elimination of the 6-month suspension rule. The removal of this rule can be done administratively with plan years beginning on or after January 1, 2019. However, the IRS indicate that the removal of the suspension period is REQUIRED for plan years beginning on or after January 1, 2020.
- Elimination of the requirement that loans must be taken first. Plans are not required to remove this requirement. If a plan does want to remove this requirement, they can do so with plan years beginning on or after January 1, 2019.
- Expanded sources for hardship. Plan may allow hardship distributions from earnings on 401(k) deferrals, QNECs, QMACs and safe harbor contributions. This can be allowed for plan years beginning on or after January 1, 2019. However, it is not required to be allowed at any time.
- 403(b) plans. Note however that earnings on 403(b) deferrals and QNECS and QMACs held in a custodial account are not eligible for hardship distribution.
In addition to the clarifications, the IRS also modified the list of expenses that meet the safe harbor reasons for immediate and heavy financial need:
- Clarified that the safe harbor for casualty losses will continue to operate as it had in the past under Code Section 165 and does NOT have to be in a federally-declared disaster area.
- Allows qualifying medical, educational, or funeral expenses to be an allowed expense for a participant’s primary beneficiary under the plan.
- Adds a new category of allowable expense: Losses due to a disaster that occurs in an area designated by FEMA.
The last thing the regulations do is create a single standard for showing that a distribution is “necessary” to satisfy a financial need. The new standard would require:
- The distribution not exceed the participant’s financial need,
- The participant has obtained all other available distributions (other than nontaxable loans if you removed that requirement), and
- The participant represents, in writing, that the participant has insufficient cash or liquid assets to satisfy the need (the plan administrator must not have actual knowledge to the contrary).
At this time, the IRS has not given model amendment language or indicated the due date for when an amendment reflecting the above regulatory items will be due.
Nyhart will continue to monitor the progress of the regulations and release updates accordingly. Please contact your account representative at Nyhart for more information or if you have any questions.