The Bipartisan Budget Act of 2018 (the “Act”) was signed into law on February 9, 2018. The Act contains several provisions that impact qualified retirement plans, including changes to hardship withdrawal provisions for plan years beginning after December 31, 2018.
Changes to hardship rules
The Act makes hardship withdrawal rules less restrictive in a number of ways:
- Elimination of the six-month suspension following hardship withdrawals. IRS regulations provide a safe harbor for when a hardship withdrawal will be deemed necessary to satisfy an immediate and heavy financial need and includes a provision that the employee must be suspended from making contributions for a period of at least six months after the distribution. The Act eliminates the six-month suspension. At this point, it is not clear whether the IRS will replace the six-month suspension with another safe harbor or eliminate the safe harbor entirely. The IRS is directed to issue updated regulations by February 9, 2019.
- Elimination of requirement to take available loans before a hardship withdrawal. Under the safe harbor described above, a participant is required to take other available distributions and plan loans prior to taking a hardship withdrawal. The Act removes that requirement.
- Expansion of amounts available for hardship withdrawals. Currently, hardship withdrawals are not permitted from (i) post-1988 investment earnings on employee pre-tax and Roth contributions, (ii) qualified nonelective contributions, or (iii) qualified matching contributions. The Act allows for hardship withdrawals to be distributed from all of these accounts. The Act also formalizes a long-standing IRS position that all other amounts under a 401(k) or profit sharing plan (including employer matching and profit sharing contributions) may be made available for hardship withdrawal.
Next steps for plan sponsors
It will be important for 401(k) plan sponsors to understand these recent changes, monitor related IRS guidance, and assess whether they will begin taking advantage of these expanded hardship withdrawal opportunities. Any changes will need to be coordinated with the plan’s recordkeeper to ensure administration is handled appropriately and that all required plan amendments are made.
If you have any questions or would like additional information regarding the Act and how it impacts qualified retirement plans, please contact MCM Senior Manager Shannon Crane via e-mail or phone (812.670.3471).