November 8, 2018 – There have been several recent legislative changes, most notably the Tax Cuts and Jobs Act of 2017 (“Tax Cuts Act”) and the Bipartisan Budget Act of 2018 (“Budget Act”). These changes can impact certain elements of 401(k), 403(b) and other retirement plans, as well as numerous health & welfare benefits. The changes to 401(k) and 403(b) plan hardship withdrawal requirements under the Budget Act will have the most significant impact.
What is changing?
The Budget Act made several changes to the hardship withdrawal rules that will become effective on the first day of the plan year that begins in 2019. The legislation:
- Amends Section 401(k) of the Internal Revenue Code to allow distributions of qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), and earnings on elective deferral contributions, QNECs and QMACs (these changes will not apply to 403(b) plans unless corrective legislation is enacted) as a hardship withdrawal.
- Directs the Treasury to update its 401(k) safe harbor regulations to remove the required six month suspension of deferral and employee contributions after receipt of a hardship withdrawal.
- Amends Section 401(k) of the Internal Revenue Code to allow hardship withdrawals without regard to whether participants have first obtained available plan loans.
The second and third changes will also impact 403(b) plans using the 401(k) plan safe harbor test. None of these changes impact the rules for unforeseeable emergency withdrawals from 457(b) plans.
The IRS issued safe harbor hardship requirements in their 401(k) plan regulations and most plan sponsors rely on them because of the objective criteria. Plan sponsors could instead adopt the facts and circumstances test but it is more administratively burdensome and would not be available for plans using a pre-approved plan document like many providers’ Volume Submitter Plan document. The second and third changes described above impact key elements of the safe harbor for determining whether a plan distribution is necessary to satisfy a participant’s immediate and heavy financial need. For that reason, it is imperative that the IRS promptly communicate its views on the potential impact of the changes on the safe harbor determination.
Many questions have been raised by plan sponsors about the changes to the safe harbor hardship withdrawal requirements, including:
- Will a plan sponsor be considered as utilizing the safe harbor determination if it keeps the six month suspension of deferral contributions?
- Will any IRS guidance impose any new requirements?
- Must QMAC and QNEC sources be made available for hardship withdrawals?
Many plan document providers have brought up some of these and other similar questions to IRS officials but the IRS had indicated that they need more time to review them before they will issue any formal guidance. Additionally, industry trade groups have been working on these issues and they have submitted comments to the IRS requesting clarification. Plan sponsors should check with their document provider to determine next steps and how these changes will impact their current plan document and possible document amendments.
This post is an excerpt from the Dopkins Risk Advisory Services newsletter. To read the complete publication, please click here.
Dopkins Wealth Management, LLC is a registered investment advisor owned by the partners of Dopkins & Company, LLP.
About the Author
Chad R. O’Connell AIF
Chad manages Dopkins’ retirement plan services group, which focuses on investment management, consulting and fiduciary governance services to corporations and not-for-profit entities. In addition, Chad also provides financial services to high net worth individuals and business owners.