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.
It also revokes a provision in last year’s Tax Cuts and Jobs Act that limited hardship withdrawals for property loss to those that occurred in a federally declared disaster area.
And it adds a new type of expense to the safe harbor list to automatically include property loss in federally declared disaster areas.
Under existing protocol, the IRS issues guidance relative to specific natural disasters. By including all federally declared disaster areas on the safe harbor list, the IRS hopes to eliminate any uncertainty or delay in how or when participants can take a hardship withdrawal.
Under the proposal, employers have the option of limiting whether withdrawals can come from earnings on employee deferrals and whether they can be drawn from employer matches and their earnings.
The proposal’s new rules largely relate to 403(b) plans. But earnings on contributions to those plans cannot be used for hardship withdrawals.
The revised list of hardship withdrawals would apply to money drawn on or after January 1, 2018.
Stakeholders have until January 14, 2019 to submit comments to the IRS.