401(k) Hardship and Disaster Hardship Distribution Easier
IRS has eased 401(k) Hardship distribution requirements. Under the Bipartisan Budget Act of 2018, P.L. 115-123 (BBA), on September 16, 2019, the IRS issued final amendments to the 401(k) plans. The amendments remove the loan first- if available- requirement for plan participants before they can take a hardship distribution from the plan. New contributions to the plan within six months of the hardship distribution were not allowed previously. Disaster relief casualty loss hardship distribution rules have also been updated.
Before BBA, a distribution was not treated as necessary if other funds to cure the hardship were available from another source including assets of a spouse or minor children. Under the new code, a distribution is treated as necessary to satisfy an “immediate and heavy financial need” of an employee if:
- The distribution amount does not exceed the amount needed to resolve the hardship
- The employee has obtained all other currently available distributions (i.e. ESOP dividends)
- The employee submitted a written representation that he or she has insufficient cash or other liquid assets reasonably available to satisfy the need
- The plan administrator is not aware of liquid assets reasonable available
The employer can rely on the employee’s word that liquid assets are not reasonably available to resolve the hardship. The IRS has outlined what the IRS defines as a hardship worthy of a hardship distribution:
- Costs relating to the purchase of a principal residence
- Tuition and related educational fees and expenses
- Payments required to avoid eviction from or foreclosure on a home
- Safe harbor expenses such as medical, education or funeral expenses, as well as repairs to damaged home that are not covered by insurance. For more on what is covered click here.
Given the severity of hurricane and storm damage in recent years, this seems like a relief for costs not covered by insurance, but use it wisely, as it is still your retirement account. You will need it down the road. Need help setting up a plan for your employees. Some see us at 401kzone.com where experienced advisors make the difference.