A lot has happened since the final regulations revising the hardship distribution rules were issued on September 23, 2019 (the “Hardship Regulations”). The Secure Act was enacted in December 2019, followed by the Cares Act in March 2020, along numerous extensions of various deadlines related to employee benefit compliance. On top of that, the country is in the middle of the COVID-19 pandemic resulting in widespread business and employment disruptions. Needless to say, it would not be a surprise if the Hardship Regulations and the amendments necessary to implement them have fallen down the list of compliance concerns. The Hardship Regulations implement statutory changes made by the Bipartisan Budget Act of 2019 and the Tax Cuts and Jobs Act of 2017, increasing access to plan benefits by reason of hardship. Importantly, the Hardship Regulations contain only two mandatory provisions. For hardship distributions that occur on or after January 1, 2020:
- Plans are prohibited from suspending employee deferral contributions and other employee contributions (from any qualified plan, 401(a) or 401(b) plan, or governmental 457(b) plan) following the receipt of the hardship, and
- To establish the need for hardship, the participant must make a representation in writing or by an electronic medium (including a recorded telephone call) that the participant has insufficient cash or other liquid assets reasonably available to satisfy the need.
The deadline to adopt amendments for the Hardship Regulations is December 31, 2021. This date applies to both 401(k) and 403(b) plans, whether the plans use an individually designed plan document or a preapproved plan document. A later deadline may apply for certain governmental plans. (See Revenue Procedure 2019-39 for 403(b) plans and Revenue Procedure 2020-9 for 401(k) plans.)
In addition to the two aforementioned mandatory changes, the Hardship Regulations contain several other optional changes – optional both as to whether to adopt them and when to make them effective. Under general plan amendment rules, the amendment deadline for mandatory amendments may differ from the deadline for optional amendments. The Internal Revenue Service is treating all amendments related to hardship distributions as “integral to” the mandatory changes, provided they are implemented with an effective date no later than January 1, 2020. Because of this treatment, the same amendment deadline applies to both the mandatory and optional changes.
The optional changes in the Hardship Regulations include:
- Plans may eliminate the requirement that a participant first take all available loans from the plan before taking a hardship.
- Plans may expand the sources for hardship distributions to include QMACs and QNECs. For 403(b) plans, this expansion does not apply to custodial accounts.
- 401(k) plans may permit earnings to be distributed for hardship. This option is not available to 403(b) plans.
- Plans may add a “primary beneficiary” as someone with respect to whom medical, educational or funeral expenses may be incurred.
- Clarification that the safe harbor event for a casualty loss applies without regard to whether the loss occurs in a federally declared disaster area.
- A new safe harbor event for losses or expenses incurred by a participant who resides or works in a federally declared disaster area.
Administratively, all 403(b) and 401(k) plans should have implemented the mandatory changes effective no later than for distributions made starting on January 1, 2020. (If they were not implemented timely, corrective action under the Employee Plans Compliance Resolution System may be needed to avoid noncompliance.) Note, however, the mandatory and optional changes (or portions of them) could have been implemented as early as January 1, 2019.
For plans that have not yet adopted amendments to implement the Hardship Regulations, it is important to record the provisions that were implemented along with the implementation effective date in order to facilitate the accurate preparation of the amendment by the December 31, 2031 deadline. To ensure that none of these items fall through the crack (given everything else that is going on), it would be a good practice to target adoption of these amendments during 2020.