New IRS Final Regulations for Hardship Distributions Under 401(k) and 403(b) Plans

Description

The IRS finalized regulations governing hardship distributions under 401(k) and 403(b) plans, providing clarity and guidance on how and when the final regulations apply. Plan sponsors must understand how the new hardship distribution rules apply to their plans and take the necessary steps to modify plan documents and ensure alignment of administrative processes with these rules.

The hardship distribution rules allow 401(k) and 403(b) plan sponsors to permit participants to request distributions if they have an "immediate and heavy financial need," and lack the financial resources to meet that need. The rules deem specific expenses to constitute an immediate and substantial financial need under the safe harbor provisions.

Before the final regulations, requesting a hardship distribution withdrawal required a plan participant first to take all available plan loans and prohibited elective deferrals for at least six months. The new rules lift these restrictions and expand the contribution sources available for hardship withdrawals.

The relief granted to plan sponsors and participants of 401(k) and 403(b) plans under the new rules are not without flaws and potential pitfalls. Plan sponsors must take care in implementing and adopting both required and discretionary plan modifications along with the timing and effective date of such changes.

Listen as our panel discusses critical provisions of the final regulations on hardship distributions, amendments to make to retirement plan documents, administrative pitfalls to avoid, and methods in overcoming compliance challenges stemming from the new rules.