Final Rule on Hardships

On September 23, the IRS published its final regulations on hardship distributions, which can be found here. This codifies several changes to hardships that we’ve been following since they were included in the Bipartisan Budget Act of 2018 and the Tax Cuts and Jobs Act signed on Dec. 22, 2017. You can read about those specifics in our 2018 Regulatory Update. On Nov. 14, 2018, the IRS published proposed regulations based upon these acts. The final rules are substantially the same as the proposed rules but include a few changes and clarifications.

The final rule includes the following changes to the hardship rules for retirement plans:

  • Adds “primary beneficiary under the plan” as an individual for whom qualifying expenses may be incurred.
  • Removes the prohibition of elective contributions for six months following a hardship distribution, i.e., participants who take a hardship must still be allowed to make their employee contributions as allowed if no hardship had been taken.
  • Removes the requirement to exhaust available plan loans prior to the hardship distribution.
  • Eases hardship verifications by creating a single general standard for determining whether a distribution is necessary.
  • Expands the sources available for hardship distributions to include elective contributions, Qualified Non-Elective Contributions (QNECs), Qualified Matching Contributions (QMACs), and the earnings on these amounts. QNECs and QMACs in a 403(b) custodial account continue to be ineligible for distribution on account of hardship.

To verify a hardship in the new rules, plan administrators must only confirm that the distribution not exceed the need, and have employees certify that they lack enough cash to meet their financial needs unless plan administrators have “actual knowledge” to the contradict the employee’s certification. The requirement that a plan administrator does not have “actual knowledge” contrary to the employee’s representation does not impose an obligation to inquire into the financial condition of employees.

Additionally, there are several key clarifications and takeaways for plan sponsors:

  • If sponsors have already updated their plans to comply with the proposed rule, those changes will satisfy the final regulations.
  • Plans subject to Section 409A, non-qualified deferred compensation plans, may keep their six-month suspension of elective contributions.
  • 403(b) plans are covered under the rule except for the expansion of sources available for hardships as stated above.
  • Employee certifications can be made in writing, by email, or via a phone call if the call is recorded.

It is important to note that some of these changes are mandatory, while others are optional. The elimination of the six-month suspension of contributions must be made operationally by Jan. 1, 2020.  You should discuss with your document provider if and when the changes will be made and update internal processes accordingly.

Multnomah Group will continue to watch for further guidance from the IRS on this topic.

Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.

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