New Legislation Relaxes 401(k) Plan Hardship Withdrawal Restrictions
The Bipartisan Budget Act of 2018 was signed into law on February 9, 2018. Hidden within the legislation are several provisions that relax the restrictions on hardship withdrawals from 401(k) plans. These new provisions that have now seen the light of day are summarized below.
- Removal of Six-Month Suspension Period. The legislation rescinds the current IRS rule that punitively prohibits a participant from making elective 401(k) deferrals for six months after taking a hardship withdrawal.
- Permissive Withdrawals from Safe Harbor Contributions. Currently, hardship withdrawals are not permitted from funds attributable to qualified non-elective contributions or qualified matching contributions made by employers under a safe harbor plan. These restrictions have been lifted.
- “Loan First” Rule Eliminated. The IRS hardship withdrawal safe harbor rules generally require that a participant first take out all nontaxable loans available from any retirement plan of the employer as a condition for eligibility for a hardship withdrawal. This condition has been rescinded.
- Earnings Available for Withdrawal. For reasons long forgotten, a participant can only receive as a hardship withdrawal the actual amount of elective 401(k) deferrals made to a plan, and not the earnings on those contributions. This strange rule will no longer apply, thus allowing withdrawals from earnings as well.
The above changes in law become effective for plan years beginning after December 31, 2018. When the time comes, employers will need to amend their 401(k) plans and summary plan descriptions. In addition, hardship withdrawal policies and election forms will need to be reviewed and modified as appropriate.