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The Treasury Department announced Friday that it will issue proposed regulations on 401(k) hardship distributions, clarifying the application of provisions of the Tax Cuts and Jobs Act of 2017 (“Tax Act”) and the Bipartisan Budget Act of 2018 (“Budget Act”), some of which take effect starting in 2019.  The regulations include the following changes:

  • Removal of 6-month suspension of deferrals after distribution. Effective for distributions made on or after January 1, 2020, plans may not continue to suspend deferrals for distributions taken after that date without violating the safe harbor.   However, a plan may eliminate the suspension of post-hardship deferrals starting with the 2019 plan year, and may be amended to permit a participant who took a pre-2019 hardship withdrawal to recommence deferrals starting with the 2019 plan year.
  • Removal of requirement to take all available loans.  Although the hardship distribution safe harbor no longer requires participant to take available loans, plans are permitted to keep this requirement after the effective date of the regulations. Some have expressed concern that removing the plan loan requirement may contribute to the dissipation of participant accounts. Helpfully, the proposed regulations give plans flexibility to retain or eliminate this requirement for plan years beginning in 2019.
  • QNECs, QMACs, earnings available for distribution. The Budget Act expanded the types of contributions available for hardship distribution to include qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), and earnings, in addition to employee elective deferrals. The regulations clarify that, in addition to contributions specifically designated as QNECs/QMACs, employer contributions that satisfy the ADP safe harbor under Sections 401(k)(12)(B) and (C) also are available for hardship distribution, because they must satisfy the same vesting and distribution rules as QNECs.
  • Casualty losses not limited to federal disaster. The Tax Act amended Section 165 of the Code to provide that, for 2018 through 2025, the casualty loss deduction permitted under that Section is limited to federally-declared disasters.  The proposed regulations clarify that the federal disaster limitation under Section 165 does not apply to the hardship distribution safe harbor.
  • Federal disaster distributions.  The regulations add a new type of expense to the hardship safe harbor, relating to expenses and losses (including loss of income) incurred on account of a FEMA-declared disaster, provided the participant’s principal residence or principal place of employment at the time of the disaster was located within the FEMA-designated area.

The Budget Act and regulations generally apply to plan years beginning on or after January 1, 2019, and conforming plan amendments will be required by December 31, 2020.

The Treasury Department will accept public comments on the proposed regulations through January 14, 2019. Please contact Slevin & Hart for more information on how the proposed regulations may affect you. We look forward to discussing this issue with you further.

This publication is intended to provide general information only, and is not intended to provide legal advice.  It may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm. The distribution of our publications is not intended to create, and receipt of them does not constitute, an attorney-client relationship.

This publication is intended to provide general information only, and is not intended to provide legal advice.  It may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm. The distribution of our publications is not intended to create, and receipt of them does not constitute, an attorney-client relationship.

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