On November 14, 2018, the Department of the Treasury and the Internal Revenue Service issued proposed regulations updating the 401(k) plan regulations for hardship distributions from section 401(k) plans.  In particular, these proposed amendments reflect statutory changes including recent changes made by the Bipartisan Budget Act of 2018.  Plan sponsors of 401(k) plans have been awaiting guidance as they make plan design choices for 2019.  While the proposed regulations do not explicitly say that plan sponsors can rely on the proposed regulations, we would not be surprised if the final regulations closely track the proposed regulations.  Comments are due January 14, 2019.  These proposed rules also affect 403(b) plans, but the rules are somewhat different – consult with legal counsel.

Key Takeaways

The proposed changes affecting 401(k) plans are summarized below, but the key takeaways from the proposed regulations include:

  • 401(k) plans must eliminate the 6-month suspension on participant contributions following a hardship withdrawal no later than January 1, 2020; plans will not be permitted to impose a suspension after that date.
  • 401(k) plans can lift the suspension on participant contributions beginning January 1, 2019, even for hardship withdrawals taken before January 1, 2019. For example, if a participant in a calendar year plan took a hardship distribution in the latter half of 2018, the plan could be amended to lift the suspension beginning January 1, 2019.
  • The proposed regulations replace the “facts and circumstances” test for determining whether a distribution is necessary to satisfy a financial need with a “general standard” that requires a representation by the participant that he or she has insufficient cash or other liquid assets to satisfy the financial need. 401(k) plans may apply the new “general standard” for distributions on and after January 1, 2019, or may continue to apply the “facts and circumstances” test through December 31, 2019.  Notably, if a plan elects to apply the new “general standard” beginning in 2019, plans are not obligated to require the participant representation until January 1, 2020.
  • Beginning January 1, 2019, safe harbor contributions may also be distributed on account of an employee’s hardship. The preamble explains this is because safe harbor contributions are subject to the same distribution limitations applicable to QNECs and QMACs, which are available for hardship distributions beginning January 1, 2019.


Continue Reading Proposed Changes to Hardship Distribution Rules Affect 401(k) Plans

An eight-year transition period for U.S. tax-qualified retirement plans covering Puerto Rico residents is set to end in 2015.  Employers that cover Puerto Rico residents under U.S. tax-qualified plans should consider spinning off the Puerto Rico portion of the plan in 2015, to avoid subjecting Puerto Rico residents to U.S. federal income tax.


Continue Reading Action Required for Retirement Plans Covering Puerto Rico Residents