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Changes to hardship guidelines for 401(k) withdrawals: What plan sponsors need to know

The IRS recently released changes to the regulations on 401(k) hardship distributions, referring to withdrawals from participants’ elective deferral accounts made because of an immediate financial burden. These new rules remove some of the barriers plan participants previously faced when looking to make a hardship withdrawal. Business owners and plan sponsors must be aware of the new regulations and the many effects they will have on their retirement plans and participants.

The key changes under the new regulations are as follows:

  • Eliminates the requirement to suspend deferrals for six months following a hardship distribution, allowing plan participants who have taken a hardship withdrawal to start to rebuild their savings more quickly. This change is mandatory as of January 1, 2020.
  • Expands and modifies the list of permissible hardship criteria:
    • Hardships for qualified medical expenses, tuition expenses, or funeral expenses are now allowed for the participant’s primary beneficiary.
    • Hardships are allowed for expenses incurred as a result of a federally-declared disaster (for participants who live or work in the disaster area).
  • Removes the requirement that participants need to obtain a loan prior to a hardship request. This change is not mandatory, so it is at the discretion of employers and plan sponsors if they would prefer to continue requiring participants to take out a loan before requesting hardship withdrawal.
  • Permits hardship withdrawals from qualified nonelective contributions (QNEC) and qualified matching contributions (QMAC), along with earnings on certain contributions.

Though plan sponsors have until December 31, 2021 to amend their 401(k) plans according to these new rules, operational changes are necessary to comply with the new regulations by January 1, 2020. It is imperative that plan sponsors start the planning process now, carefully considering how these new regulations will affect the company’s 401(k) plan. Plan sponsors should work with legal counsel and the plan’s third-party administrator to amend the plan documents and work with employers to communicate these changes to plan participants.

Please visit: https://www.bonadio.com/our-services/accounting-auditing/employee-benefit-plan-audit to learn more about our employee benefit plan services.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.