Final Regulations for Hardship Withdrawal Guidance – What Plan Sponsors Should Review That Impact 2020

The Internal Revenue Service (IRS) released final regulations regarding hardship withdrawals in September 2019. The final regulations implement the following changes affecting hardship withdrawals:

  • Removal of six-month prohibition on elective deferrals after hardship withdrawal. Whereas prior law prevented plan participants from contributing to their plan for six months after taking any hardship distribution, final regulations eliminate this stipulation and allow a participant to still contribute to the plan. The suspension requirement may be maintained through 2019, but must be removed by Jan. 1, 2020.
  • More options for available funds. Plan sponsors are permitted to allow hardship distributions from other sources, including profit-sharing and stock bonus contributions, qualified nonelective contributions and qualified matching contributions.
  • Removal of loan requirement. Plan sponsors are permitted to allow hardship distribution without requiring participants to take a loan against their accounts.
  • Hardship withdrawal for expenses sustained by beneficiaries. A participant’s primary beneficiaries can receive benefit from said participant’s hardship distribution for qualifying educational, medical or funeral expenses.
  • Self-certification documentation requirements. The final regulations include guidance regarding the requirements of self-certification for immediate and heavy financial need, if the plan sponsor permits. Plan sponsors are required to provide certain notifications to the participant prior to making a hardship distribution, specifically that the hardship distribution is subject to be taxed and cannot exceed the immediate and heavy financial need amount. The participant must also preserve and provide source documents available upon request to the participant’s employer or administrator.

Final regulations are effective for plan years beginning after Dec. 31, 2018. For questions about hardship withdrawals, please contact us at info@dhg.com.

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