New legislation modifying hardship withdrawal rules

August 30, 2018

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Earlier this year, the Bipartisan Budget Act of 2018 (BBA) introduced three changes to the provisions for hardship withdrawals, including some that affect plans that follow the safe harbor rules. The changes are designed to ease restrictions for participants who need to access their qualified retirement plan assets because of an immediate financial need.

Effective with plan years starting after December 31, 2018:

  1. Plans no longer need to require participants to exhaust their loan options before taking a hardship withdrawal.
  2. Plans are no longer required to suspend plan contributions (elective deferrals) for six months following a hardship withdrawal.
  3. Hardship withdrawals may include qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs), as well as earnings on elective deferrals.

The first two changes impact the safe harbor rules.

Current safe harbor guidelines

The current 401(k) plan rules provide a safe harbor for determining that the distribution is necessary to satisfy the financial need if participants receiving hardship withdrawals:

  1. Have tapped all other available distributions from the plan and any other employer-maintained plans;
  2. Have taken all nontaxable loans in the plan and all other employer-maintained plans; and
  3. Are prevented from making plan contributions for six months after receiving a hardship distribution.

Factors to consider

The existing safe harbor rules allow a participant to take a hardship withdrawal if the distribution is made to satisfy an immediate, heavy financial need and the amount is necessary to satisfy such need.

The BBA-enacted changes to hardship withdrawals are not mandatory for plan sponsors, so some plans may decide to not change their hardship withdrawal rules.

Most Vanguard retirement plans follow the safe harbor rules for hardship distributions. There is ambiguity, so we don't know yet whether plans that currently use them can maintain their "safe harbor" status if they choose not to adopt either, or both, of the new provisions. In the spring, the Department of Treasury indicated that the target date for the IRS to provide additional guidance is August 2018. Ideally, these items will be clarified. Once the IRS issues the impending guidance, we will provide another update with a summary and our perspective to assist you in your determination of how to proceed.

Next steps

As previously noted, the new changes are not mandatory. But we anticipate that plan sponsors who do decide to incorporate the new provisions for hardship withdrawals into their plans will need to make some plan design changes to accommodate the new legislation. To help ensure that these changes are made in a timely manner, we encourage plan sponsors to begin discussions with counsel about their plans' hardship withdrawal provisions.

Vanguard is here to help you through this regulatory change, and we're preparing our systems and procedures for the 2019 effective date. Once we've confirmed your intentions regarding any plan changes for hardship withdrawal rules, we'll work with you to implement the updated plan rules and participant materials.

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