A Reminder about the Changing Rules for Hardship Withdrawals
The opportunities to take in-service distributions from retirement plans are limited prior to age 59½. An exception is hardship withdrawals.
The requirements for hardship withdrawals are changing as follows:
It should be noted that plan sponsors have always been free to define the circumstances under which employees qualify for hardship withdrawals. The requirements to take a loan and suspend contributions are part of the safe harbor which most employers have chosen to adopt. Where the safe harbor is adopted, the IRS will not challenge hardship withdrawals. Some employers have elected to follow the safe harbor with the exception of the suspension of contributions.
Adopting these changes in the hardship rules will require a plan amendment. Those sponsors using a service provider’s prototype or volume submitter document are best advised to wait for the provider to update its procedures and prepare the necessary amendment.
At this point, it is unclear whether employers may continue to impose the requirements to take a loan and suspend contributions and still qualify for the safe harbor. We hope further guidance from the Department of Treasury will answer this question.
These changes are effective for plan years beginning on or after January 1, 2019.
For more information on the changing rules for hardship withdrawals, please contact Acumen Wealth Advisors at 423-825-4796.