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In February, the Bipartisan Budget Act of 2018 was signed into law. The bill contained a number of provisions, but most important to the retirement world was the improved flexibility around hardship distribution requirements. Previously, the rules required a participant to first take a loan (if the plan offered loans) and to then be suspended from contributing to the plan for six months. The old rules also limited sources available for distribution.
The main enhancements, for plan years effective Jan. 1, 2019, are:
- Removal of the requirement to take a loan first or to suspend contributions for six months
- Additional money sources available for withdrawal (i.e.: earnings on contributions, Qualified Nonelective Contributions, etc.)
- More flexible criteria for withdrawal. “Primary beneficiary under the plan” has been added to the objective Safe Harbor standards for medical, education or funeral expenses. As well as certain federally declared disaster areas.
Note: Effective for plan years beginning after 1/1/2020, there will not be an option to suspend participants for six months, by law. This rule is optional for 2019, but not for 2020.
One caveat to all of this added flexibility: 403(b) Plans. Earnings are currently not eligible for hardship withdrawal in a 403(b) Plan.
How to Request and Qualify
“Immediate and heavy financial need” is still a requirement but the methods to prove a hardship is necessary under the non-Safe Harbor standards are now more streamlined. The withdrawal amount cannot exceed the participant’s need, the participant must withdrawal all other funds available to them (other than loans) first, and the participant must certify they have insufficient funds. This too is not a requirement until plans years beginning after Jan. 1, 2020.
Plan sponsors: If you have not already done so, make sure to check with your recordkeeper and/or third party administrator to confirm the steps, if any, you need to take. Some providers are doing tack-on amendments (i.e.: no signature required by the plan sponsor), others will require signatures.
In Case You Didn’t Know…
- Retirement plans are not required to offer hardship withdrawals, but according to the annual PLANSPONSOR Defined Contribution Survey results, around 86% of plans do allow.
- Hardship withdrawals are taxable and the 10% early withdrawal penalty may be applied if the participant is under age 55
- Hardship withdrawals should be carefully considered in advance. They cannot be repaid.
MMA Upper Midwest is a part of Marsh & McLennan Agency LLC (MMA). Securities offered through MMA Securities LLC (MMA Securities), member FINRA / SIPC, and a federally registered investment advisor. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Variable insurance products distributed by MMA Securities LLC. MMA and MMA Securities are affiliates owned by Marsh & McLennan Companies