Retirement Plan Hardship Distribution Changes

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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.