QUESTION: I perceive that getting a hardship distribution from a 401(ok) plan requires a sure sort of hardship and proof {that a} 401k plan distribution is critical to alleviate the hardship. What’s the present normal for proving necessity?
ANSWER: Up to now (usually, distributions previous to 2020), plans may use both of two requirements for figuring out whether or not a hardship distribution was mandatory: a protected harbor normal or a “non-safe harbor” normal. The protected harbor (1) required a participant to first get hold of all presently accessible distributions and plan loans, and (2) prohibited elective deferrals and after-tax contribution to plans maintained by the plan sponsor for a minimum of six months after the hardship distribution. The non-safe harbor was nominally a willpower based mostly on all related info and circumstances, however IRS laws allowed an employer to depend on a participant’s illustration that the necessity couldn’t moderately be met by sure specified means (e.g., liquidation of property, loans, different plan distributions), supplied it had no opposite information relating to the participant’s skill to pay.
For distributions made on or after January 1, 2020, there is just one—comparatively easy—normal. The brand new normal imposes solely two necessities to determine {that a} distribution is critical:
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Staff should get hold of some other presently accessible distributions below the plan and some other plan of deferred compensation, whether or not certified or nonqualified, maintained by the employer (together with distributions of ESOP dividends below Code § 404(ok)); and
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Staff should signify in writing (together with through an digital medium or in such different type because the IRS prescribes) that they’ve inadequate money or different liquid property moderately accessible to fulfill the monetary want.
Money and different liquid property aren’t “moderately accessible” if they’re earmarked for cost of one other obligation within the close to future, resembling hire. A plan administrator can’t settle for an worker’s illustration if it has precise information opposite to the illustration.
Plans can select to impose solely the minimal circumstances described above, or they’ll impose extra circumstances if, for instance, a plan sponsor is worried that plan accounts be preserved for retirement. Extra circumstances may embrace requiring that staff first take all nontaxable loans accessible below all plans maintained by the employer. For distributions made on or after January 1, 2020, nevertheless, extra circumstances can’t embrace a required suspension of elective contributions or worker (after-tax) contributions below tax-qualified plans (together with 401(ok) plans) and sure different retirement plans.
For extra info, see EBIA’s 401(ok) Plans guide at Sections XV.D (“Establishing a Lack of Different Sources: Distributions Previous to 2020”), XV.E (“Common Commonplace for Figuring out Lack of Different Sources”), and XV.G (“What Documentation Ought to Be Required for Hardship Distributions?”).
Contributing Editors: EBIA Employees.
