401(k) retirement plans often have a feature to allow participants to take a hardship distribution. These distributions come with stricter rules and regulations that plan management must follow. These include distribution amounts can only be taken from the participant’s vested balance, participant must exhaust the loan option first, and they cannot defer amounts into the plan for six months after taking a hardship withdrawal. In 2018, the Bipartisan Budget Act of 2018 (the “Act”) was passed and it changed these rules. Although this is effective for plan years beginning after December 31, 2018, the mandatory implementation of these changes to the plan document will be effective January 1, 2020.
Here are the changes brought on by the Act:
- Eliminates the six-month suspension on employee contributions;
- These types of contributions are now allowed to be included in the amount of hardship:
- Profit-sharing contributions
- Qualified Nonelective Contributions (QNEC)
- Qualified Matching Contributions (QMAC)
- Earnings on any contributions deposited into the participant’s retirement account; and
- Eliminates the requirement for the participant to first take a loan against their retirement account.
If you have not already done so, we encourage you to discuss these changes with your third-party administrator to update the plan document so that it is compliant with the Act. The Act currently only impacts 401k plans with a cash or deferral arrangement.
If you would like to know more about this topic, please contact:
Tania Quigley, CPA
Tania Quigley has been a member of Cerini & Associates’ audit and consulting practice area for ten years where she focuses on serving the firms nonprofit and employee benefit plan clientele. Tania has experience in performing financial statement audits and reviews, tax return preparation, cost report preparation and filing, retirement plan audits, and other consulting. Tania brings her expertise, diversified background, and helpful approach to all of her engagements.