The Internal Revenue Service (IRS) has made it easier for employees to make withdrawals from their retirement plans during the time of hardship. The IRS also made it easier for employees to rebuild their accounts.
Some of these changes affecting 401(k) and 403(b) plans are mandatory, requiring employers to have made the changes by Jan. 1, 2020, while others are optional.
The final rule does the following:
• No longer requires employees to wait six months after employment before making contributions to their employer-sponsored retirement plan.
• Allows employees to withdraw earnings on 401(k) contributions, and on profit-sharing and stock-bonus contributions in time of hardship. Previously, employees could only withdraw contributions, not earnings. Earnings on 403(b) contributions would remain ineligible for hardship withdrawals.
• Makes it easier for plan administrators to determine if a hardship withdrawal is necessary by only requiring that a distribution not exceed what an employee needs. Also, employees must certify that they lack enough cash to meet their financial needs.
Optional changes that only will be made if adopted by the employer:
• No longer requires employees to take a plan loan before making a hardship withdrawal.
• The list of allowed hardships for taking a hardship withdrawal now can include the following for a participant, their spouse or children or other dependents: medical, education and funeral expenses.
Plans allowing hardship distributions will need to be amended to reflect the new rules. Please contact us for more information.