Changes to Hardship Withdrawal Rules in Retirement Plans

Retirement plans may allow an employee to withdraw money from their plan for financial hardships. The Bipartisan Budget Act of 2018 which was signed into law on February 9, 2018 changes some of the rules regarding Hardship Withdrawals for plan years beginning after December 31, 2018.

While each person may have their own definition of what a financial hardship is for them, federal law and your plan document define financial hardship as it relates to your retirement plan. Under the IRS regulations, a hardship distribution may be made only for an immediate and heavy financial need, and only if other resources are not available to meet that need.

The IRS safe harbor regulations list six specific events that are deemed to satisfy the requirement that the hardship distribution are for an immediate and heavy financial need:

• Expenses for medical care for the Participant, the Participant’s spouse, or the Participant’s dependents
• Costs directly related to the purchase of a principal residence for the Participant.
• Payment of tuition, related educational fees, and room and board expenses, for up to the next 12 months of post-secondary education for the Participant, the Participant’s spouse, or the Participant’s dependents.
• Payments necessary to prevent the eviction of the Participant from his or her principal residence or to prevent foreclosure on the mortgage on that residence.
• Payments for burial or funeral expenses for the Participant’s deceased parent, spouse, children, or dependents.
• Expenses for repair of damage to the Participant’s principal residence that would qualify for the casualty deduction under Code §165

A distribution is deemed necessary to satisfy a financial need if certain requirements are met:
• The distribution must not be in excess of the need;
• All other distributions and loans must have been taken from all other employer plans;
• Employee elective deferrals must be suspended for at least six months.

The Bipartisan Budget Act of 2018 directs the IRS to eliminate two of the requirements listed above.

(1) Delete the requirement that an employee take all available nontaxable loans prior to receiving a hardship distribution
(2) Delete the six-month suspension of employee deferrals following the hardship distribution.

Under current law, employee deferral contributions can be withdrawn in the event of a financial hardship, but the earnings attributable to employee contributions cannot be withdrawn. Under the new bill, earnings on employee elective deferrals will be eligible for withdrawal upon financial hardship.

If you have any questions or would like to know more about this topic, please contact Pat Gallagher at 610-225-1217 or pgallagher@cclbenefits.com.