IRS Issues Final Regulations for Hardship Distributions

We previously reported on the Bipartisan Budget Act (the “Budget Act”) hardship distribution rule changes for qualified retirement plans. On September 23, 2019, the IRS issued final regulations implementing certain statutory changes to the hardship distributions rules, including those required by the Budget Act. The final regulations closely track the proposed regulations issued in November 2018. The following are some of the more significant changes implemented by the final regulations:

  • Employers must remove the six-month suspension of a participant’s plan contributions following a hardship distribution occurring on or after January 1, 2020.
  • Participants may receive a hardship distribution without first requesting a loan from the plan. 
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Congress Eases Restrictions on Hardship Distributions

We previously reported on certain changes made to the hardship distribution rules for qualified retirement plans by the Tax Cuts and Jobs Act.  Since then, Congress has made additional and significant changes to those same hardship distribution rules by the passage of the Bipartisan Budget Act (the “BBA”).  The BBA loosens various restrictions on a participant’s ability to request and receive a hardship distribution.  In particular, the BBA provides:

  1. Effective for plan years beginning after December 31, 2018, participants may receive hardship distributions comprised of employee elective deferrals, employer contributions and earnings on both.  Traditionally, hardship distributions were limited to employee elective deferrals and did not include qualified nonelective contributions, qualified matching contributions, safe harbor contributions or earnings on the same.
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