The IRS Issues Final Regulations for New Hardship Distribution Rules

Rosemarie Panico-Marino
October 10, 2019

How do you determine hardship?

Earlier this year, we discussed several changes to hardship distribution rules resulting from the Bipartisan Budget Act (BBA) of 2018. At the time, the changes were in proposed form, but the Internal Revenue Service (IRS) indicated that plan sponsors may rely on them and administer their retirement plans accordingly. 

Many of the proposed changes were finalized and more clarity was provided around others. Under the final regulations, the elimination of the six month deferral suspension has been retained. Beginning on January 1, 2020, a plan sponsor may no longer require that an employee stop making deferrals for six months after receiving a hardship distribution. Also finalized was the removal of the requirement to obtain a loan from the plan prior to requesting a hardship distribution. However, this is not a mandatory change and a plan sponsor may continue to require a participant to obtain a plan loan before requesting a hardship distribution. 

The IRS has also provided additional guidance on how to determine the hardship need.  Under prior regulations, the plan sponsor was able to make a determination using a “facts and circumstances” approach.  The final regulations have removed this approach and provide structure about how to make the determination. The following three standards to determine hardship need are outlined below:


  1. The financial request may not exceed the need, including any taxes and penalties associated with taking the distribution.
  2. The participant is first required to take all other distribution options from the plan, excluding loans if the sponsor allows, prior to requesting the hardship distribution. These other distribution options may include in-service withdrawal, withdrawal of rollover balances, and distributions from other qualified and non-qualified plans the employee participates in sponsored by the employer.
  3. The employee must represent to the employer that he/she has insufficient funds or liquid assets reasonably available to satisfy the need. This representation may be made in writing or by electronic medium including a recorded phone call, website verification or email—to name a few. It is no longer the plan sponsor’s responsibility to collect written proof of the financial need.

It is important to point out that these standards may be relied upon provided the plan sponsor has no actual knowledge to the contrary.

The regulations also finalize the ability to withdraw earnings on the participant elected deferrals which were previously not allowed. The IRS has clarified that safe harbor contributions, qualified non-elective contributions (QNEC) and qualified matching contributions (QMAC) will now be eligible for hardship distributions.  However, 403(b) plans sponsored by nonprofit organizations cannot distribute QNEC or QMAC contributions. 

Finally, more clarity was provided about safe harbor hardship reasons for natural disaster relief. Plan participants may request a hardship distribution to cover expenses related to natural disasters as long as they live or work in the affected area. Such examples include flooding, hurricanes and wildfires. The rules allow the distribution to be taken even if the disaster has not been declared a federal disaster.  However, only the plan participant or beneficiary may be eligible. Under the new rules, there is no time limit for distribution requests after the natural disaster occurs. 

When a federally declared disaster occurs, the IRS will typically publish disaster relief rules specific to that disaster.  These relief rules may offer distribution eligibility to a plan participant’s family and dependents, but will often expire after a given period of time. The disaster relief provision under the hardship rules does narrow down who may be eligible for the hardship, but there are no time limits imposed. Since the disaster does not have to be federally declared, the new rules offer a little more flexibility to plan participants.

The changes to the regulations must be incorporated into the legal plan document and will require a plan amendment. Generally speaking, the amendment must be adopted by the plan sponsor’s tax filing deadline for the 2020 tax year.  Your plan document sponsor or recordkeeper will prepare the final amendment package.

If you have any questions about the new regulations for hardship distributions, please do not hesitate to contact our Corporate Retirement Services Team at 312.564.3806

Rosemarie is the Retirement Plan Services group leader in the Corporate Retirement Services group at CIBC Bank USA, with more than 35 years of qualified plans and financial industry experience. As a national practice, the Corporate Retirement Services team works closely with CIBC commercial bankers and advisors throughout the country to bring expertise and co-fiduciary services to clients’ retirement plans. In this role, Rosemarie is responsible for providing consulting, investment advisory and consulting services to sponsors of qualified and non-qualified retirement plans.

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