U.S. Capitol building with traffic light nearby that's green One change is that participantswill not be required to exhaust plan loan options before requestinga hardship withdrawal. (Photo: Shutterstock)

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The Department of Treasury has finalized new rules on hardshipwithdrawals from defined contribution plansthat were laid out in the Bipartisan Budget Act of 2018.

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Last November, Treasury issued proposed new hardship regs. "Thefinal regulations are substantially similar to the proposedregulations, and plans that complied with the proposed regulationswill satisfy the final regulations," according to the final rule,which is scheduled for official publication in the Federal Registeron September 23.

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Under the new reg, hardship withdrawals can be extended toinclude a plan participant's named primary beneficiary forqualifying medical, educational, and funeral expenses.

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The safe harbor list for qualifying expenses is extended to homedamages participants suffer in areas of natural disaster. Hardship withdrawals fordisaster-related expenses will only be available to the affectedplan participant, and not a participant's relatives or dependents.That provision is different from the relief Treasury hastraditionally offered to plan participants in disaster areas, whichallows distributions for family members of savers.

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Under Treasury's disaster-relief announcements, participantshave a hard deadline by which to make withdrawal claims. Under thenew regulation, there is no such deadline.

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By adding disaster relief to the qualifying events under thesafe harbor, regulators intend to eliminate any delay oruncertainty over access to plan funds. Going forward, Treasury saysit does not expect to issue disaster-relief announcements foraffected retirement savers.

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The new regulation also removes the previous 6-month prohibitionon payroll deferrals after a hardship withdrawal is taken. Underthe amendments to the tax code, participants will not be requiredto exhaust plan loan options before requesting a hardshipwithdrawal.

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Going forward, hardship withdrawals can be made from aparticipant's elective contributions, and the matchingcontributions from employers, including the earnings on thesavings.

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Previously, only the employee-share of savings could be tapped.Individual plans may, however, limit participants from drawing downsavings from employer contributions.

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The new rules on withdrawals of elective distributions alsoapply to 403(b) plans.

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The updated regulations apply to distributions made on or afterJanuary 1, 2020, but those made subsequent to passage of theBipartisan Budget Act of 2018 can also apply under the newregulations.

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As was the case before the amendments in the final regulation, ahardship distribution must be used for "an immediate and heavyfinancial need," according to an IRS fact sheet.

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But the plan participant must not have other availableresources, such as, for instance, a vacation home. The distributionamount must not exceed an employee's need. That need can includetaxes or penalties that result from the distribution.

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