In the wee hours of this morning, Congress passed a spending bill to end the most recent government shutdown that had just begun at midnight. Although the bill was focused on funding the government and dealt with military spending and other items, a couple of retirement-plan-related provisions managed to find their way in.
Specifically, the new law eliminates two obligations related to participant hardship withdrawals from qualified retirement plans:
- The six-month deferral suspension, and
- The requirement to first take a loan before taking a hardship withdrawal.
Under current law, a plan sponsor must suspend a participant’s salary deferral contributions for six months following a hardship distribution. Not only does this mean that the participant is saving less for his or her retirement, but it can also create confusion when it comes time to resume deferrals at the end of the suspension period.
The spending bill eliminates this six-month deferral suspension.
Current law requires that if a plan permits both loans and hardship distributions, a participant must take the maximum available loan to alleviate the financial need before being allowed to take a hardship withdrawal. There is an exception if taking the loan would exacerbate the hardship. Think of a participant looking to purchase a primary residence. If taking the plan loan would cause the participant to no longer qualify for a mortgage, he or she can skip the loan and go straight to the hardship distribution.
The spending bill altogether eliminates the requirement to take a loan before taking a hardship distribution.
Both of these changes were included in earlier versions of the recently enacted Tax Cuts and Jobs Act, but didn’t make the final cut.
These changes are effective for plan years that begin after December 31, 2018, and it is expected that plan sponsors will be required to adopt an amendment to their plan documents to implement the change.
Rest assured that DWC is on the job and will provide additional details when they are available.
For more information about hardship distributions, please visit our Knowledge Center here.