Retirement Plan Hardship Distribution Changes
By Luke Swanson, CIP, QKA
What changes are forthcoming regarding qualified retirement plan hardship distribution rules?
The Bipartisan Budget Act of 2018 (BBA-18) was signed into law in February 2018, and among other items, it relaxed hardship distribution rules as they relate to employer-sponsored retirement plans.
Prior to BBA-18, hardship distributions came with these general requirements.
Participant deferrals must be suspended for six months after the hardship distribution was taken.
Hardship distributions were limited in the types of assets participants could take from the plan on account of hardship.
Participants were required to exhaust all other options prior to taking a hardship distribution, including taking a loan if available from the plan.
BBA-18 implements the following changes to relax those previously described rules.
Requirement to suspend deferrals for six months has been eliminated. The current safe harbor rule requiring the plan to suspend participant deferrals for six months following a hardship distribution have been eliminated so that participants can continue to save for their retirement, even after receiving a hardship distribution. The Treasury Department has been directed to draft new regulations to reflect this legislative change.
Qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), and deferral earnings are eligible for hardship distribution. BBA-18 provides that QNECs and QMACs, as well as the attributable earnings, are now eligible to be taken as a hardship distribution. Also new, the earnings on elective deferrals may be taken as a hardship distribution.
Hardship distributions may be taken prior to a loan option being exercised. If the plan offers loans, a participant may take a hardship distribution without having to take a loan first. Participants were previously required to exhaust all other options before taking a hardship distribution, including taking a plan loan; however, this often didn’t alleviate the financial burden that participants were already under, and so BBA-18 eliminated this requirement.
When are these hardship distribution changes effective?
The softening of hardship rules under BBA-18 is effective beginning for plan years after December 31, 2018.
Is the retirement plan document required to be amended for these changes?
Likely yes, most employers sponsoring a qualified retirement plan will need to amend their plan document to reflect the new rules for hardship distributions under BBA-18. The date by which this amendment would need to be adopted has yet to be set by the IRS.
Note: In-service distributions, including hardship distributions, are not allowed in certain retirement plans, such as money purchase pension plans, target benefit plans, and most defined benefit plans. Therefore, the BBA-18 hardship distribution rules would not be applicable.