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Budget Act Makes Changes to Hardship Distribution Rules

John Nownes,

April 11, 2018

Retiring Your Way

Articles

Although last year’s sweeping tax reform law left the retirement plan provisions largely untouched, the recent budget deal made significant changes to the hardship distribution rules.

The Bipartisan Budget Act of 2018 (the “Budget Act”), which President Trump signed on February 9, was the legislation that reopened the federal government after a brief shutdown.  In addition to temporarily funding the federal government, the Budget Act also relaxed the hardship distribution rules effective for plan years beginning on or after January 1, 2019.

To provide background on this issue, a retirement plan can allow a participant to receive a hardship distribution on account of an immediate and heavy financial need.  Under IRS safe harbor rules, a hardship distribution can be made to pay: (a) medical expenses; (b) expenses directly related to the purchase of the participant’s principal residence; (c) educational expenses; (d) expenses to prevent eviction from the participant’s principal residence, or to prevent foreclosure on the mortgage of that residence; (e) burial or funeral expenses; or (f) expenses to repair damage to the participant’s principal residence in certain cases.

The Budget Act makes the following changes in the hardship distribution rules:

  • A participant will no longer be prohibited from making elective deferrals to the plan for a period of six months following a hardship distribution.
  • A participant will not have to take all available loans from the plan before receiving a hardship distribution.
  • A participant can receive a hardship distribution from his/her safe harbor contribution account (which is not currently allowed).
  • Finally, under current law, earnings in a participant’s elective deferral account cannot be distributed in case of a hardship.  Only a participant’s elective deferrals in such account can be distributed.  The new law changes this rule, permitting earnings on a participant’s elective deferrals to be distributed in case of hardship.

Although plan sponsors are not required to adopt the above-described provisions, Union Bank & Trust Company expects most plan sponsors will adopt these relaxed provisions.

As January 1, 2019 approaches, expect Union Bank to provide more detailed information on what  action is needed to incorporate the new hardship distribution rules.  Undoubtedly, the plan document will need to be amended; a summary of material modifications will need to be provided to participants; and changes will need to be made in the plan’s hardship distribution paperwork.

If you have any questions about the new hardship distribution rules, please contact your Union Bank & Trust Company Relationship Manager.

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This blog article is for informational purposes only, and is not an advertisement for a product or service. The accuracy and completeness is not guaranteed and does not constitute legal or tax advice. Please consult with your own tax, legal, and financial advisors.