Now that Summer's Over, Something to Worry About for the Fall
I hope all of you who work for or with retirement plan sponsors had a delightful summer! As for the fall, it is about to get interesting for most of you mainly due to the Bipartisan Budget Act of 2018, more commonly known as the Tax Reform bill. The bill changed several hardship distribution provisions, effective 1/1/2019, that would be applicable to all plans that permit distributions because of hardship -- which are the vast majority of 401(k) and 403(b) plans. Unfortunately, the IRS has yet to issue regulations that will tell plan sponsors exactly HOW to administer the new hardship rules. With less than four months remaining in the year, this will give plan sponsors a challenging timeframe in which to implement the regulations.
What we will be watching for in the hopefully-soon-to-be-released regulations, among other items, is guidance in the following critical areas:
- The six-month suspension of elective deferrals requirement for hardship distributions has been eliminated, effective in 2019. But what happens if a hardship distribution is taken in the last 6 months of 2018? Should those existing suspensions be allowed to continue into 2019, or should all suspension cease 1/1/2019?
- Effective in 2019, earnings on elective deferrals may now be distributed for hardship. Previously, only the deferrals themselves, and not earnings, could be distributed. Due to differing regulations, there is some question as to whether this new rule applies to 401(k) and 403(b) plans or only to 401(k) plans.
- There is no longer a requirement that a loan be taken prior to a hardship distribution being available. Many plan sponsors view such a provision as desirable, since it minimizes plan leakage. If a plan sponsor continues to require that loans be exhausted, can they continue to rely on the important IRS safe harbor provisions that have been established for hardship distributions, or will they no longer qualify for the safe harbor? The answer is-- well, we don’t know, until the IRS issues regulations or other guidance in this regard.
Of course, as soon as IRS hardship regulations are released, Cammack Retirement will be providing extensive coverage, so make certain that you are signed up for our newsletters and Compliance Alerts, and that you follow me on Twitter for up-to-the minute information!
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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