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DISCLAIMER: This blog is published for general information only - it is not intended to constitute legal advice and cannot be relied upon by any person as legal advice.  U.S. Treasury Regulations require us to notify you that any tax-related material in this blog (including links and attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties, and may not be referred to in any marketing or promotional materials.  While we welcome you to contact our authors, the submission of a comment or question does not create an attorney-client relationship between the Firm and you. 

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Monday
Feb122018

Budget Agreement Contains Changes to 401(k) Plan Hardship Distribution Rules

The budget agreement approved by Congress and signed into law on February 9, 2018 includes several changes to the rules governing hardship distributions from 401(k) plans.  These changes — which were included in the House version of the tax reform bill, but removed during the reconciliation process — may make hardship distributions more readily available to plan participants.  All of the changes are optional and will apply to plan years beginning after December 31, 2018.

First, the budget law directs the IRS to modify the regulatory safe harbor for determining that a distribution is necessary to satisfy a participant’s “immediate and heavy financial need.”  Specifically, the regulation will no longer require a six-month suspension of the participant’s contributions following a hardship withdrawal.

Second, the budget law creates a new statutory provision governing hardship withdrawals.  New Code Section 401(k)(14) authorizes hardship distributions of qualified nonelective employer contributions, qualified matching contributions, and earnings on either of them, in addition to hardship distributions from elective deferrals plus earnings.  It also provides that a distribution will not fail to be made due to hardship solely because the participant does not take any available plan loan.  (Obtaining all currently available nontaxable plan loans remains a condition of the regulatory safe harbor that included the six-month suspension rule.)

These changes are almost certainly intended to apply to 403(b) plans that offer hardship distributions.  However, due to what appears to be a technical glitch, application of the second set of changes to 403(b) plans may require further IRS guidance.

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