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Trust But Verify...But Not For Hardship Distributions

Haden McDonald 10/12/23


Years of experience have shown us that anytime Congress attempts to simplify the retirement plan rules, they often end up doing just the opposite.  SECURE 2.0 is no exception, with many of the provisions purporting to make life easier while actually being far more convoluted than necessary.  One area where they really hit the mark, however, is with regard to hardship distributions, and the S2 simplifications follow several others made in recent years.

Brief History Lesson

Back in 2019, the IRS published new hardship distribution regulations following Congress’ earlier passage of the Bipartisan Budget Act and the Tax Cuts and Jobs Act.  We covered those changes in more detail here.  The TL;DR is that those regulations simplified things by:

  • Eliminating the required suspension of deferrals following a hardship;
  • Removing the requirement for a participant to take a loan first;
  • Expanding access to all contribution sources; and
  • Making investment earnings on the salary deferral source available.

Notably, 403(b) plans didn’t get to take advantage of these changes (hint: foreshadowing).

Participant Self-Certification, Take 1

One of the biggest changes in the 2019 regulations was the ability for participants to self-certify their financial need in the case of hardship distributions.  This meant that plan sponsors could rely on the participant to provide basic information related to reason, amount, and financial need that form the basis of the hardship distribution rules.

While a definite step in the right direction, the IRS did create a new “summary substantiation method” which sponsors could require participants to follow to cover their bases.  This still left plan sponsors a little queasy about documentation and their role in reviewing hardship distributions, because it left open the possibility that the IRS could question things and seek additional documentation on audit.  Plus, there was an overarching directive that required sponsors to deny a request if they had actual knowledge that contradicted what a participant certified.

Participant Self-Certification, Take 2

Well fear not, because S2 more or less solves that problem!  For plan years that begin after December 29, 2022 (S2’s effective date), plan sponsors can now rely on participants to self-certify all of those details…full stop.  No special summary certification process, etc.  In fact, the verbatim text of S2 says:

“The Secretary [of the Treasury] may provide [but is not required to] by regulations for exceptions to the rule…in cases where the plan administrator has actual knowledge to the contrary of the employee’s certification, and for procedures for addressing cases of employee misrepresentation.”

Those bits in brackets are our additions to the quote, but think about what that statement implies.  Unless/until the IRS (which is part of the Treasury Department) says otherwise, these new rules suggest sponsors can accept a self-certification that they know is straight-up incorrect.  That prospect probably makes a lot of people feel a little queasy, but that’s ultimately how the law is written “to a T”.

Note that this self-certification only applies to plans that limit hardships to one of the seven listed “safe harbor” reasons.

Even better is that it appears plan sponsors can take advantage of this simplification without even having to amend their plans.  While many of the S2 provisions will require plan amendments, these new rules address procedures that are generally not covered in plan documents, meaning that there isn’t really an existing provision to amend.

By the way, these new self-certification rules apply to 403(b) and 457(b) plans too.

Updating the Forgotten 403(b)

Remember that foreshadowing we mentioned earlier?  Previous updates to the hardship rules have focused on 401(k) plans, forgetting all about the non-profit counterparts in the 403(b) world.  Not anymore!  At long last…well, starting with the 2024 plan year, S2 has aligned the hardship distribution rules for 403(b) plans with those that apply to 401(k) plans.

Applying a single set of rules?  Now, that’s simplification!  With that said, these rules are written into plan documents, so sponsors of 403(b) plans will need to amend to take advantage of the changes.  However, the deadline to adopt those amendments is the end of the 2025 plan year, which means 403(b) sponsors can begin operating under the new rules two years before they must adopt the associated amendments.

Have questions about how these new rules apply to you and your plan?  Look no further! The experts at DWC can help you turn hardship distributions into easy-ship distributions.

For more information, please visit our SECURE 2.0 Act Resource Page.

Topics: 401(k) Plan, 403(b), Legislation, In-Service Distributions, Hardship Distributions, Plan Distributions, SECURE 2.0


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The views expressed in this blog are those of the authors and do not necessarily represent the views of any other person or organization. All content is provided for informational purposes only and is not intended to be tax or legal advice.