Employee benefit plans that offer hardship distributions may find that new legislation eases some burden related to providing these distributions. Plan participants may also find the changes beneficial and less burdensome.
The Bipartisan Budget Act of 2018 (the Budget Act) made several significant changes to hardship distribution rules. Those changes become effective for plan years beginning on or after January 1, 2019 and include:
- The elimination of the six-month suspension of employee deferrals after a hardship withdrawal
- The elimination of the requirement for a participant to take a loan prior to requesting a hardship withdrawal
- Extending the funds available for withdrawal from elective deferrals only to include investment earnings, employer safe-harbor contributions, employer qualified non-elective contributions and employer qualified matching contributions
Hardships are often an area that result in the plan sponsor’s failure to comply with the plan document or with regulatory requirements. Ceasing deferrals and tracking the six-month suspension period requires careful monitoring. Ensuring all available loans are exhausted prior to a hardship can be complicated, as well as, limiting the hardship to the correct amount.
Plan sponsors will benefit from easier administration under the new legislation. Participants will benefit since more funds could be available to reduce their hardship burden.
Changes provided by the Budget Act are not required to be adopted by a plan. Plans that elect to adopt the changes; however, must amend their plan documents.
If you have questions about hardship withdrawals, please contact a KraftCPAs representative. We’ll be glad to answer your questions.