New Final Hardship Rules, Explained

Speakers at an Oct. 22 workshop session at the ASPPA Annual Conference provided an early “deep dive” into the final rules issued last month.

 

Robert M. Richter, Retirement Education Counsel at the American Retirement Association, and Michael F. Smith, Vice President Qualified Plan Consulting at Voya Financial, took a soup-to-nuts look at the final rules published Sept. 23, but focused mainly on changes in the areas of permissible hardship expenses and distributions necessary to satisfy a financial need.

 

Hardship Expenses

 

Under the rules, expenses for the purchase of a principal residence or to prevent eviction or foreclosure from a principal residence are permissible. In addition, permissible expenses for medical care, post-secondary education (next 12 months), and funeral expenses can include the participant’s primary beneficiary at the time of the hardship, Smith noted.

 

Casualty Losses (Revised Rule)

 

The 2017 Tax Cuts and Jobs Act (TCJA) limited the casualty loss deduction for federally declared disasters, Smith said, noting that this created an unintentional change to the list of permissible hardship events. The final reg (as did the proposed reg) corrects this, once again allowing the use of the casualty deduction as prior to the TCJA.

 

Disasters (New Rule)

 

Under a new rule, expenses incurred by an employee as a result of FEMA-declared disasters are now permissible, provided the employee’s principal place of employment or residence was located in the disaster area.

 

This new expense is not as broad as relief that the IRS used to provide, according to Smith. Unlike that relief, a new event does not include expenses of relatives and dependents, consistent with IRC §7805A (automatic extension of due dates of returns). Also, he noted, there is no time limit on withdrawals and no relaxation of procedural requirements. According to Smith, the IRS expects plans to be flexible on required documents based on a disaster.

 

Smith indicated that there is no extended deadline to adopt conforming amendments, and the IRS does not expect to continue providing relief (but might on amendments).

 

Clarification Provided

 

Richter noted that the ARA comment letter on the proposed rules asked whether a plan is required to permit a hardship distribution for all events. According to the Preamble to the final regulations, the answer is “no.” Rather, a plan can limit the events, which is consistent with current practices, he said, such as not permitting expenses incurred by primary beneficiaries.

 

Distributions Necessary to Satisfy Financial Need

 

The final rule eliminates the 6-month suspension period when no financial alternatives are reasonably available. This is a mandatory change, he noted. The final regulations clarify that elimination of the rule only applies to qualified plans, 403(b) plans and governmental 457(b) plans, and that employees’ after-tax contributions cannot be suspended.

 

The latest effective date is for distributions made on or after Jan. 1, 2020, he said, although a plan can implement earlier including elimination of the requirement while a participant is already in a suspension period.

 

The rule also eliminates the facts-and-circumstances methodology for determining the need, eliminating the requirement to obtain plan loans – though it’s important to note that a plan is not required to eliminate this requirement, he added.

 

So What’s Now Required to Show Need?

 

Under the final rules there are three requirements for demonstrating financial need:

 

1. The employee has obtained all “currently available” distributions under the plan and all other plans of deferred compensation. The employee must obtain all distributions “currently” available under the plan all other plans of deferred compensation. The final regulations do not exclude distributable ESOP dividends, even though they might be small amounts. For this purpose, “plans of deferred compensation” include both qualified and non-qualified plans.

 

2. The employee provides written representation to the plan administrator. This would be representation that employee has insufficient cash or other liquid assets reasonably available to satisfy the need (this “reasonably” available standard is new), and “written” includes electronic media permitted by Reg. 1.401(a)-21(e)(3). Also, according to the Preamble, the employee can make a representation if other assets “provided those assets wereearmarked for payment of an obligation in the near future (for example, rent),” Richter noted.

 

3. The plan administrator cannot have actual knowledge that is contrary to the employee’s representation. This clarifies that the plan administrator has no obligation to inquire into the financial condition of employees. Smith noted that this provisions was in the old regulations as well as the 2018 proposed regulations. According to the final regulations, this requirement was retained because it “helps ensure the integrity of the procedures.”

 

These three requirements must be effective for distributions made on or after Jan. 1, 2020, Smith noted.

 

Additional Requirements

 

Smith noted that like the proposed regs, the final regulations allow a plan to include other requirements. A plan:

• can retain a loan requirement;
• can impose a minimum distribution (e.g., at least $1,000); and
• can limit the number of hardship withdrawals in a year.

 

Transitioning to the New Rules

 

Smith and Richter suggested some bottom-line items that warrant attention:

• Plans must use new certifications for distributions beginning on and after Jan. 1, 2020.
• Providers must address the distribution of new forms to plan administrators.
• How will a plan handle receipt of old forms that are still in circulation and received in 2020?