When it left the House of Representatives in December 2017, the Tax Reform and Jobs Act carried several changes to the limits that should be placed on hardship withdrawals. While those changes never made it to the final version, many of them are included in the Bipartisan Budget Act of 2018. These include:
- Plans may allow participants to take hardship withdrawals from participant elective deferrals, qualified non-elective contributions, and qualified matching contributions, as well as earnings accrued on these on these contributions.
- Plans will no longer be required to ensure that participants have taken loans if available in the plan before allowing a hardship.
- The Secretary of the Treasury is directed to change the Treasury Regulation that required participants who take a hardship withdrawal be suspended for six months from making elective deferrals following the hardship distribution going forward.
The good news is that this applies only to hardships taken after the beginning of the plan year commencing January 1, 2019, if the plan has been amended by then. Therefore, all the work to allow and support these changes doesn’t have to be completed until January 1, 2019 at the earliest.
Now the bad news: One of the tenets on which many recordkeepers depended when writing their hardship withdrawal processes was that the processes were, for the most part, very standardized across all plans. They generally followed the safe harbor guidelines, so these plans primarily allowed withdrawals only from pre-tax elective deferrals (as opposed to matching money or any other sources), and only of the amount contributed to these sources (i.e., no accumulated earnings on that money was allowed in the hardship). However, now the requirements for a hardship withdrawal can be very plan-specific, not only regarding what sources and earnings to include, and in what order, but also whether they will require a loan to be taken prior to a hardship or require a suspension of future contributions going forward.
While many recordkeepers may have maintained effectively the same process to calculate and execute a hardship withdrawal across all plans, now a significant plan-level setup may be necessary to identify which sources are in scope, what the hierarchy is for the withdrawal, whether a loan is required, and whether it will require a suspension. Moving from standardized to plan-specific design could be difficult, time-consuming, and require significant testing.
—
To learn more about the Bipartisan Budget Act of 2018 and its impact on the retirement services industry, download our new guide.
