Over the past few years, several laws and regulations were passed to loosen rules on hardship distributions for 401(k) and 403(b) retirement plans. These new provisions came in handy for many participants who needed an easier way to access retirement accounts during the pandemic. While there was an extension to give plan sponsors more time to revise plans to reflect the changes, the final day to amend pre-approved qualified retirement plans that adopted hardship distribution regulations is Dec. 31, 2021.
While it is not required, plans can include provisions that allow in-service distributions if the participant has an immediate and heavy need and the withdrawal is necessary to meet that need.
In summary, here are the five ways that plans could have been changed to make hardship withdrawals:
- Eliminate the six-month suspension on contributions after hardship withdrawal
- Expand safe harbors to include federally declared disaster-related expenses
- Replace facts and circumstances test with three-part test to determine financial need
- Eliminate need of loan requirement prior to hardship distribution
- Expand sources of funds for hardship distributions
- Plans need to have the proper amendments if hardship withdrawals were allowed on or after Jan. 1, 2020.
With the Dec. 31 deadline approaching, plan sponsors should act quickly to examine whether these changes were made to their plans. As listed in a previous Insight, some of these changes were mandatory, while others were optional. Pre-approved plans should contact service providers to see whether amendments were added to the plan document. In addition, safe harbor plans should ensure that the safe harbor notice includes the proper hardship withdrawal information.
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