On September 20, 2019, the Internal Revenue Service (IRS) issued amended requirements for hardship distributions from Sec. 401(k) plans, thereby eliminating the requirements that plan participants take loans from the plan (based on availability of funds) before they would be permitted to take a hardship distribution from the plan.  In addition, the amended requirements state that participants may continue to make contributions to the plan. 

The final IRS ruling further explains the casualty loss hardship distribution rules for both disaster relief and for determining the amount of plan funds that will be available for distribution based on the fact that funds are not available from other sources.

The objective of the amendment is to provide one general standard for determining whether a distribution is necessary.

A brief overview of other changes under the new regulations ensure that a hardship distribution is treated as necessary to satisfy an immediate and heavy financial need of an employee that cannot be met by drawing on other reasonably available resources, under these circumstances:

  • The amount of the distribution is not in excess of the amount required to satisfy the financial needs
  • The employee has obtained all other currently available distributions, including ESOP distribution dividends under SEC 404(k), under the plan and all other deferred qualified or unqualified compensation plans maintained by the employer
  • The employee has provide a written explanation to the plan administrator  that he/she has insufficient cash or other liquid assets needed to address the immediate and heavy financial demands
  • To the plan administrator’s knowledge the information provided by the employee is truthful and accurate as presented

The IRS final regulations on 401(k) plan hardship distributions have taken into account the Bipartisan Budget Act of 2018, the Tax Cuts and Jobs Act and other related acts.  If these changes are relevant to you please reach out to your Investment Advisor or TPA to determine the appropriate procedures going forward when faced with an employee looking for a hardship withdrawal.