Hardship Reform: Available Now

| June 23, 2019
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Just when you wrapped your head around what a hardship was per the IRS definition, comes new compliance changes. Many of us were aware these changes were coming but kept mum since we had no official guidance. Any plan, beginning after December 31, 2018, that intends to be qualified must comply operationally with legislative changes until the final regulations are released. After final regulations are released, the plan document must be amended to reflect the operational changes that have been implemented.

Basically, with this legislation, more sources of money may be available to participants to take for hardships, i.e. QNEC & QMACs, along with the related earnings, as well as QACAs. Plans will also be permitted to allow earnings on elective deferrals to be available for hardship withdrawals. In addition, the six month suspension of employee contributions must be eliminated for distributions made after January 2020. The requirement to take any available loans first before applying for the hardship will be an option per the proposed regulations.  Plans can add a new safe harbor hardship expense for expenses incurred because of certain federally declared disasters. This can be applied for hardship distributions made as early as January 1, 2018. 

These proposed regulations also add the 'need' of the employee's 'primary beneficiary under the plan' relating to certain medical, educational and funeral expenses. 

In the plan year beginning 1/1/2019, plan sponsors will be required to ‘obtain a representation that a distribution is necessary to satisfy a financial need.’ We currently encourage all plan sponsors get proof of the hardship amount requested in writing, and to keep this documentation with any signed applications for a hardship withdrawal for audit purposes.

While this is a voluntary plan feature, many plans do allow for hardship withdrawals. It is up to the plan sponsor to determine how best to apply these new changes. Sponsors might consider a communication to participants who have requested hardships to encourage them to resume, or not stop deferring into the plan.

This is all good news for participants, who are still recovering after the natural disasters we heard about on the news nearly every day last year. Massive fires, floods and storms took their toll in almost every state of the union. Putting the pieces back together with the help of a hardship withdrawal from your plan account might be the best option for some, but we must make it easy for them to continue to save for retirement as well.

We will be preparing and sending out the questionnaire for the coming amendment as soon as we receive the appropriate language. If you have questions about your plan’s current hardship details, don’t hesitate to give us a call at 610-251-0670!

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