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January 14, 2019 - Changes to Hardship Rules

You know your employee is going through tough financial times. Perhaps he is facing home foreclosure through no fault of his own. Maybe she has unexpected medical expenses that aren’t covered by insurance.Money already set aside in a retirement plan may help them to get back on their feet. Provisions of the Bipartisan Budget Act of 2018, which takes effect in 2019, will make it easier to access funds in a 401(k) or other qualified defined contribution plan and increase the pool of money available as hardship withdrawals. What is a hardship withdrawal? The IRS says a hardship withdrawal must cover an “immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need.” This need may include medical expenses, tuition and related educational fees and expenses, burial or funeral expenses, and costs related to purchasing or repairing damage to a primary residence or needed to prevent eviction or foreclosure. What has changed? Provisions in the new Bipartisan Budget Act help to ease constraints on hardship withdrawals in three ways: As of January 2019, employees will be able to withdraw not only from the portion of their retirement account deducted from their compensation but also from company matching contributions and earnings on the account. Previously, withdrawals were limited to the funds contributed by the employee. The act eliminates the requirement that a participant take a loan before receiving a hardship withdrawal. While loans, which must be repaid, will still be permitted, they no longer are required as the first step. Employees will be able to continue saving for retirement immediately after taking a hardship withdrawal. A hiatus previously in place prevented employees from contributing to their retirement accounts for six months after receiving the hardship withdrawal, forcing them to miss out on company matching funds and interest earned.