Things are getting easier for participants who need to take a hardship withdrawal. Effective for plan years starting after December 31, 2018, and subject to a plan amendment, if your plan allows hardship distributions, participants will be able to withdraw more of their account than previously allowed.
Under the rules established by previous legislation, participants have only been eligible to receive the monies that they actually contributed to the plan, as well as certain, non-restricted employer contribution accounts, if allowed in the plan document. Under the new law, participants will be able to withdraw the earnings on their 401(k) accounts, and also withdraw from previously restricted employer accounts, such as safe harbor contributions or QNECs needed to pass compliance testing, when requesting a hardship distribution.
In addition, if a plan allows participants to take both hardship distributions and participant loans, under the old law, participants were required to take a loan first before they could take a hardship distribution. Under the new rule, there is no requirement to first take a loan.
The new law also lifts the requirement that employees need to stop their employee deferrals to the plan for a six month period once they have taken the hardship distribution. Employees can continue to defer and share in any employer match with no restrictions.
There is one way in which the new law has become more restrictive: Under the old law, one of the statutory reasons allowed to take a hardship is to pay for expenses related to the repair of damage to the participant’s principal residence. Hardships for this reason going forward will only be allowed if the damages occur in a federally declared disaster zone.
We will provide an update on these changes once the IRS finalizes the details and provides guidance on these matters.
Please stay tuned!!