Publication

November 30, 2018Published Article

Understanding Treasury's New Hardship Distribution Rules

Law360

The Bipartisan Budget Act of 2018,[1] signed into law on Feb. 9, included a few provisions affecting qualified retirement plans. Among the budget act’s changes were provisions modifying the rules pertaining to hardship distributions. Prior to the budget act, the hardship rules’ requirements were intended to encourage participants to consider the seriousness of their hardship needs. The budget act has greatly reduced this consideration and simplified plan administration.

Specifically, the budget act added Section 401(k)(14)  to the Internal Revenue Code, which provides that qualified nonelective contributions, or QNECs, qualified matching contributions, or QMACs, and earnings on QNECs, QMACs and elective deferrals may be used to fund hardship distributions. Prior to enactment of the budget act, the hardship distribution rules prohibited using amounts in a participant’s plan account that were attributable to QNECs, QMACs and earnings on elective deferrals to fund a hardship distribution. Code Section 401(k)(14) also eliminates the requirement that a participant exhaust plan loans before being allowed to take a hardship distribution.

In addition to newly created Code Section 401(k)(14), the budget act directed the Treasury Department within one year of the enactment of the budget act to: (i) remove Treasury Regulation 1.401(k)-1(d)(3)(iv)(E)(2) , which provides that a participant is prohibited from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least six months following receipt of a hardship distribution and (ii) make any other modifications necessary to carry out the purposes of the code’s 401(k) hardship distribution provisions.

The budget act provided that the addition of Code Section 401(k)(14) and the revised regulations contemplated by the budget act would be effective for plan years beginning after Dec. 31, 2018. Following the directives set forth in the budget act, on Nov. 14, 2018, the Treasury Department issued proposed regulations executing and expanding on these changes and revising the list of safe harbor expenses for hardship distributions.

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