In September 2019, the IRS published long-awaited final hardship distribution regulations for almost a year following their initial proposal. While there are no substantive changes from the proposed regulations, every 401(k)/403(b) plan will require an amendment for hardship distribution changes elected for plan years beginning after December 31, 2018, and those changes required January 1, 2020, as a result. In general, all contribution source balances, including associated earnings (NOTE: earnings on 403(b) deferrals are not allowable for inclusion in the available hardship balance), are optionally available for a hardship distribution. However, the plan terms will still determine what sources are available.

Mandatory changes effective January 1, 2020 (but could be earlier, if elected) include (1) elimination of the elective deferral suspension requirement following a hardship, and (2) requiring a participant to certify, as a condition of receiving a hardship distribution, that the participant has insufficient cash or other liquid assets reasonably available to satisfy the hardship need. This does not replace the requirement for a participant to provide supporting documentation for the hardship need.

Optional changes include (1) the need to take or not take a plan loan before taking a hardship, (2) contribution sources available for hardship may be limited to something less than all sources, and (3) earnings on contribution sources may be optionally available. In addition, the ‘safe harbor’ standard for hardship distributions has expanded to include expenses (including lost income) incurred by participants with a primary residence or place of business in a federal disaster area.

The above information is a summary of the broader and more widely impacting provisions in the final regulations. Other details for specific situations, as well as more detailed information for 403(b) and 457(b) plans, are not discussed here.

Generally, IRS preapproved plans must be amended by the due date (plus extensions) of the employer’s tax return for the tax year, which includes January 1, 2020, regardless of the effective date of the amendment (could be as early as January 1, 2019). Section 403(b) plans will generally have an earlier required amendment date. SEK will be providing its retirement plans with specific information regarding the required amendment, adoption timing, and other information soon. Others will want to review with their plan provider the next steps.