Hang on to your hats because a lot of what you thought you knew about hardship distributions is changing in 2019. That’s right. Tucked away neatly in the Bipartisan Budget Act of 2018 were some surprising changes to the hardship rules for 401(k) plans.
Happily, the allowable reasons for taking a hardship distribution will not change. See below for a breakdown of the updates.
6 Month Rule No Longer Applies
Previously, employees who took a hardship distribution were required to wait 6 months before they could resume contributions to their plan. Beginning in 2019, that will no longer be the case. Now, this makes no real sense to me. I get it. Life happens, but if things are bad enough that you’re taking a hardship distribution, how do you have the money to contribute to your 401(k)? But as usual, no one asked my opinion when they wrote these updates.
No More Loan First Rule
Currently if your plan offers loans, the IRS requires plan participants to take the maximum loan amount before they could qualify for a hardship distribution. That will not be a requirement under the new law.
Earnings and Employer Match Are Eligible
Effective 2019, both contributions, earnings, employer Qualified Matching Contributions, and employer Qualified Non Elective Contributions will be eligible for a hardship withdrawal.
Plan sponsors should also be aware that these rules will not take effect automatically. They will require an update to the plan document. Your friendly neighborhood TPA should be happy to help you sort through all the details. If for some reason they aren’t happy to help, call us.
As always, remember, it’s YOUR retirement we’re talking about. The more you know and understand, the better off you will be.
MBA, QKA, CBC