In 2018, we wrote about the Bipartisan Budget Act of 2018 (“Budget Act”) and the unanticipated inclusion of certain provisions of the Budget Act that generally expanded the availability of hardship withdrawals from retirement plans.  Since the publication of that article, the U.S. Treasury Department has released proposed regulations that begin to provide the guidance that practitioners and plan sponsors require in order to implement the changes to the hardship withdrawal rules (“Proposed Regulations”).  Final regulations on this matter are anticipated sometime later in 2019.  However, since several provisions of the Budget Act were slated to be effective as early as January 1, 2019, it is important to understand the content of the Proposed Regulations now in order to be poised to take advantage of them once they are finalized.  Therefore, the following generally discusses the content and impact of the Proposed Regulations.

Before discussing the Proposed Regulations, it is worth mentioning that it is not possible to be entirely definitive on the impact and requirements of the new rules until they are issued in final form at some point in the future.  Thus, even though there may be plan sponsors who would like to take immediate advantage of the content of the Proposed Regulations, it would be prudent to wait until the Proposed Regulations are issued in final form before attempting to effectuate the guidance provided therein in order to avoid inadvertently violating any yet to be released requirements.  In this regard, it also is noteworthy that most retirement plans will need to be amended in order to take advantage of these changes.  However, as a result of the yet to be final status of the Proposed Regulations, many plan document providers have not yet released the plan language and documentation necessary to formally memorialize these changes.  Consequently, even though it is expected that plan sponsors will have a “grace period” during which they will be able to retroactively amend their plans to incorporate the necessary plan provisions, it remains prudent for all parties to understand the full scope of the new rules before attempting to comply with their requirements.  Thus, again, it likely is in the best interests of most plan sponsors to delay implementing these new rules until final regulations are released by the U.S. Treasury Department.

Prior to the release of the Proposed Regulations, Treasury regulations existed that generally described how a hardship withdrawal would only be permissible to the extent that the amount distributed was necessary to satisfy a financial need.  In this regard, the existing regulations established both a facts and circumstances method and a safe harbor method of satisfying this requirement.  However, the Proposed Regulations propose to eliminate both the facts and circumstances and safe harbor methods of establishing the amount of the financial need in favor of a new three prong test that mirrors the old safe harbor method with certain exceptions.  The three prongs of the newly proposed rule are as follows: 1) the distribution does not exceed the amount of the participant’s need; 2) the participant has obtained all other currently available distributions under the plan and all other plans of deferred compensation maintained by the employer; and 3) on or after January 1, 2020, the participant must represent in writing that he or she has insufficient cash or other liquid assets to satisfy the need.  To further explain, this new test would only apply to determining the amount of the purported need and essentially would serve to eliminate the currently applicable regulatory requirements that a participant: 1) first obtain any nontaxable plan loans to attempt to satisfy the need; and 2) have his or her ability to make elective deferral contributions suspended for at least six months after the receipt of the hardship withdrawal.

The Proposed Regulations would also affirmatively establish that, effective as of January 1, 2020, plan sponsors shall be prohibited from suspending a participant’s ability to make elective deferral contributions following his or her receipt of a hardship withdrawal.  In addition, the Proposed Regulations indicate that plan sponsors have the discretion to eliminate the elective deferral suspension rule as early as the first day of the first plan year beginning on or after December 31, 2018 and that such discretion extends to the elimination of the rule in connection with hardship withdrawals that may have been granted prior to the effective date of such change.

Finally, the Proposed Regulations formally expand the money sources from which a hardship withdrawal may be obtained to also include qualified nonelective contributions (“QNECs”), qualified matching contributions (“QMACs”) and the earnings associated with those amounts as well as earnings on elective deferral contributions.  However, it is noteworthy that plan sponsors are not required to expand the sources from which hardship withdrawals may be made in this manner.

We hope that this article helped you to better understand this topic.  However, please be advised that it is not intended to serve as financial, tax or legal advice so it should not be construed as such.  If you have questions about this topic or are considering implementing these rule changes, we strongly urge you to further discuss it with a qualified retirement plan professional.  For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.