Bipartisan Budget Act Impacts Hardship Withdrawal Rules
In passing the Bipartisan Budget Act of 2018 (the “Act”), Congress loosened the reins on hardship withdrawals from 401(k) and 403(b) plans. The Act eases limitations on amounts eligible for hardship withdrawal, eliminates the six-month suspension requirement on elective deferrals after making a hardship withdrawal, and removes the requirement that a participant obtain all available loans before obtaining a hardship withdrawal. Starting in 2019, employees will find it much easier to make hardship withdrawals from their employer-sponsored retirement plans should an employer choose to implement these voluntary changes.
Prior to the Act, participants in a 401(k) or 403(b) plan could only make a hardship withdrawal from elective deferral contribution amounts. Hardship distributions from employer matches, non-elective contributions, or earnings on elective deferrals were prohibited. However, under the new rule, Congress has removed this prohibition and expanded on the amounts eligible for hardship withdrawal. The Act allows employees to take a hardship distribution from elective deferral earnings and employer contributions.
The Act also eliminates the six-month suspension of contributions after a hardship withdrawal. In other words, employees no longer have to wait six-months before making further contributions to their retirement plan and are able receive employer matching contributions immediately after taking a hardship distribution. Removing the prohibition on contributions during this six-month period provides administrative simplicity for employers and helps employees continue to save for retirement.
Finally, Congress used the Act to eliminate the rule requiring participants to take all available loans, even loans available under other qualified plans, before taking a hardship distribution. Although the requirement that participants take all other available distributions before obtaining a hardship withdrawal still remains intact, the removal of the participant loan requirement makes it easier for employees to take a hardship withdrawal and helps them avoid loan repayments.
As employers consider implementing these new changes, they should ensure they continue to educate participants on the importance of saving for retirement. While the ease on hardship withdrawal restrictions may prove beneficial for some employees, others could end up significantly limiting their retirement savings (especially considering the 10% penalty tax applied to hardship withdrawal amounts). Employers should also consider the administrative simplicity that comes with removing the six-month suspension on contributions following a hardship withdrawal and expanding the types of contributions that are eligible for hardship distribution. If you are considering making any of these changes to your company’s retirement plans or have any questions on the new law, please contact our employee benefits group.