Legal Blog

Relaxing The Rules For Hardship Withdrawals From Qualified Pension Plans

On February 9, 2018, the Bipartisan Budget Act of 2018 was enacted by Congress and signed into law.  The Budget Act affects qualified retirement plans offered by employers in important ways.  The principal change is to relax the rules governing hardship withdrawals by employees.  Although not required, a retirement plan may allow participants to make hardship withdrawals due to an immediate and heavy financial need.  The employer serving as plan administrator decides whether the employee has an immediate and heavy financial need.

Employers and plan administrators should take note of the new rules to ensure that their plan documents reflect all legally-mandated changes.

There are three major rule changes.  First, the Budget Act deletes the requirement that an employee exhaust his or her ability to take loans under the plan prior to obtaining a hardship withdrawal.

Second, the new rule allows plan participants to take hardship withdrawals from all employer non-elective and matching contributions as well as the employee’s own elective deferrals.  A hardship withdrawal also can be taken now from earnings on any employee deferrals and employer contributions. Prior to the change, an employee was allowed only to make a hardship withdrawal from amounts deferred from employee compensation, not from employer contributions and earnings on all deferrals and contributions.

Third, the Budget Act directs the U.S. Treasury Secretary to modify the current 401(k) rules to remove the current 6-month prohibition on a participant making employee contributions to a pension account from his or her compensation following a hardship withdrawal.

These changes take effect for plan years commencing on or after January 1, 2019. They likely also will apply to 403(b) plans, which are similar to 401(k) plans but can only be adopted by tax-exempt organizations.

Employers should review their plan documents to ensure that the operative provisions are not outdated in light of the Budget Act changes.  In addition, employers should review their non-qualified deferred compensation plans to see if any analogous provisions also should be changed or updated.

As a mainstay area of my practice, I advise companies, their pension plans and their plan trustees on ERISA and related legal matters, including how to ensure their pension plans reflect changes in the law.  If you have a question, call me.



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