Do deferrals have to stop after a hardship distribution has taken place? A recent blog entry offers an answer based on two different scenarios.
In “Do We Still Need to Suspend Deferrals Following a Hardship Distribution?,” a recent entry on its blog, DWC looks at whether such an action needs to be taken by considering what should be done regarding two 401(k) plan participants. Both took hardship distributions to cover the cost of graduate school tuition; however, one did so in September 2019, and the other in January 2020.
Sometimes timing is everything, and DWC suggests that maxim holds in this case. A critical factor, they say, is what the new regulation the IRS issued in this regard says. To wit: For the participant whose hardship distribution took place after the start of 2020, deferrals do not have to stop, as the new regs say that plans cannot suspend employee 401(k) deferrals for any hardship distributions taken after Dec. 31, 2019. But it’s a very different story for the other participant.
For the participant whose hardship distribution took place in September, the plan sponsor can choose one of three options regarding to apply the suspension of deferrals for hardship distributions taken in 2019.
DWC notes that such questions have a short shelf life. They will no longer be an issue after July 1—because by then it will be six months after the end of 2019, so any suspension that carried over from 2019 will have expired.
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