The revised list of hardship withdrawals would apply to money drawn on or after January 1, 2018. (Photo: Diego M. Radzinschi/ALM)
The Internal Revenue Service has issued a proposal accounting for new rules on hardship withdrawals from defined contributions plans passed in the Bipartisan Budget Act of 2018.
Under existing rules,
- Hardship distributions can only be taken when a participant suffers “an immediate and heavy financial need.”
- The distribution can't be greater than the amount of money the participant needs.
- And the participant must first exhaust other avenues of liquidity, like a plan loan or distribution from an employee stock ownership plan.
Currently, a safe harbor provides six types of expenses that qualify for a hardship distribution. If a hardship distribution is taken, participant deferrals to savings plans are suspended for six months.
What the Bipartisan Budget Act did
The Bipartisan Budget Act modified the rules on hardship withdrawals by removing the six-month prohibition on deferrals, and allowing participants to access not only the deferrals they made, but also the earnings on those deferrals and money from employer matches and the earnings on them.
Participants can also claim a hardship withdrawal without first taking a loan from a retirement plan.
What the IRS proposal would do
The proposed rule expands the list of events that qualify under the safe harbor by including medical, education, or funeral expenses incurred by a beneficiary of a participant's 401(k) account.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
