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New Retirement Plan Hardship Distribution Rules: What You Need to Know

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December 3, 2019 | Legal Alert
Eric Loi & Allen Fineberg
Cherry Hill, NJ

The IRS recently amended the rules applicable to hardship distributions from 401(k) and 403(b) plans.   The new hardship distribution regulation relaxes some of the restrictions on the availability of hardship distributions and simplifies the related administrative procedures for processing such distributions beginning on January 1, 2020.  

Background.  Active participants in 401(k) and 403(b) plans generally are not eligible to receive in-service distributions of elective deferrals prior to attaining age 59½ except for “hardship” distributions, which are defined as distributions that are necessary to meet an “immediate and heavy financial need”.  Prior to issuance of the new regulation to comply with the Bipartisan Budget Act of 2018, the rules provided for the following: 

The New Hardship Distribution Regulation.  The new regulation effectively makes getting hardship distributions easier for participants of 401(k) and 403(b) retirement plans by loosening restrictions that previously may have prevented such distributions.  In order to comply with the new regulation, plan sponsors will need to carefully review their current 401(k) and 403(b) plans and related documents, as well as administrative forms, and to amend them where applicable.  The regulation changes the rules in several important ways: 

As under the prior rule, the employer may not rely on the certification if it has actual knowledge to the contrary. 

Plan Amendment Deadlines.  Plans will have to be amended to reflect the hardship distribution rules under the new regulations, which are applicable to hardship distributions made on or after January 1, 2020 (although plans are permitted to implement the new rules for distributions beginning in 2019).  The deadlines for amendment vary depending on the type of plan maintained by the employer: 

Action Steps.  In order to ensure compliance with the regulation, plan sponsors should: 

If you have questions or need more information about the new hardship regulation or about implementing changes to the hardship distribution procedures, please contact Eric Loi, Allen Fineberg, or any member of the Flaster Greenberg Employee Benefits and Executive Compensation Group.

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