Compliance Partner General Less Restrictive...
Less Restrictive 401(k) Hardship Withdrawals Proposed
By Michelle Higgins

It’s a constant challenge: Families need money, sometimes urgently, while at the same time they need to save for retirement.

Occasionally, employees who contribute to a 401(k) plan need to tap into those funds to cover a sudden, significant expense. Enter the hardship withdrawal.

Hardship withdrawals are not repaid to a participant’s 401(k) plan, as opposed to a plan loan which gets repaid with interest. Withdrawals, therefore, are subject to income tax and permanently reduce an employee’s retirement savings within the plan, making withdrawals a last-resort option for plan participants facing a financial crisis.

Hardship withdrawals are not repaid to a participant’s 401(k) plan, as opposed to a plan loan which gets repaid with interest.

In November 2018, the Internal Revenue Service (IRS) proposed changes to ease up on several 401(k) hardship withdrawal restrictions. The IRS accepted comments into mid-January. The final rules may differ from the proposed changes.
What changes are on the table for discussion?
Current Proposed
Plan participants who make a hardship withdrawal may not contribute to the plan for six months. Plan sponsors may, beginning in 2019, eliminate the six-month suspension after a withdrawal. And, beginning in January 2020, plans would no longer be allowed to suspend contributions following a withdrawal.
Plan participants must take a plan loan first, if available, and then take a hardship withdrawal if needed. The new rule, if passed, would allow plan sponsors to skip the loan step for plan participants and go right to hardship withdrawal. The rule would apply to distributions beginning in January 2019. This change would be optional for plan sponsors, if passed, as opposed to lifting the six-month contribution penalty which would be mandated.
Plan participants may draw only upon their own 401(k) contributions, and not earnings, such as stock bonus contributions. If passed, effective 2019, plan participants may withdraw earnings as well as contributions in their 401(k) plans.
To date, plan participants may make hardship withdrawals for limited situations impacting an immediate need such as securing housing, preventing eviction, and avoiding foreclosure, to name a few. The new rule includes any expenses that result from a federal disaster as designated by the Federal Emergency Management Agency (FEMA). Adding this rule may speed up the process for families to access much-needed funds during a disaster.
Plan administrators must consider “all the facts and circumstances” to decide if a participant’s need warrants a hardship withdrawal. If passed, the new rule states that plan administrators need only to be sure a distribution doesn’t exceed what the participant actually needs, and that the participant can substantiate the need for a withdrawal.
What’s the bottom line? Proposed changes to 401(k) hardship withdrawals are being considered. If passed, the new rules would impact how plan participants may access their retirement funds in urgent financial situations.
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