In a highly anticipated move, the IRS released their final regulations related to hardship distributions in the September 23, 2019 edition of the Federal Register (Final Regulations). FIS has been tracking the proposed hardship regulation changes very closely and we are pleased to provide our clients with this update to detail what you can expect as we move forward. In this release, we will answer some of the most frequently asked questions received from our clients as well as what we understand about the Final Regulations to date.
How did we get here?
The Final Regulations enact various hardship distribution provision changes that had been proposed by the Treasury, including changes in the Bipartisan Budget Act of 2018, the 2018 proposed regulations, and the Tax Cuts and Jobs Act, among others. The Final Regulations finalize many of the proposed changes in the hardship distribution rules for 401(k) plans in the previous releases (and clarified in the Final Regulations to include non-custodial 403(b) plans) along with amendment timing requirements for various plan types.
What hardship provisions were modified as part of the Final Regulations?
· Mandatory elimination of the 6-month (or 12-month) prohibition on elective contributions following a hardship distribution,
· An optional provision to remove any 6-month deferral suspension periods on prior hardship distributions,
· Clarification that 6-month suspension of deferrals to certain non-qualified plans (such as a 409A plan) may continue under the Final Regulations,
· Inclusion of qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs) as part of the balance available for hardship distribution, along with associated earnings.
o Note: Earnings on 403(b) plan deferrals are not allowed for inclusion in the hardship balance,
· Inclusion of qualified automatic contribution arrangement (QACA) contributions in the balance available hardship distribution,
· Removal of the requirement that a participant must first take any available loan(s) under the plan to meet the requirements for a hardship distribution,
· Interpretation that the IRC Section 165(h) casualty loss related to repairs of a principal residence need not be limited to federal disaster areas,
· Addition of a new hardship event under the safe harbor hardship standards that permits a Participant to receive a hardship distribution as a result of losses, including loss of income, related to a federally declared disaster, if the participant’s primary residence or place of employment are in the disaster area,
· Formalization of the existing rule that includes a Participant’s primary beneficiary’s financial hardship when obtaining hardship distributions with respect to medical, educational, and funeral expenses under the deemed hardship standard (in addition to the financial hardship of a Participant, Participant’s spouse, or dependent),
· Consolidation of the financial needs test (determination of necessity) under the regulations away from a facts and circumstances based determination. Under the revised general standard, the Plan Administrator must ensure that:
o The hardship distribution request does not exceed the financial need;
o All other available distributions from the Plan (or other Plans maintained by the employer) have been obtained prior to the hardship distribution request; and
o Effective for hardship distributions completed after December 31, 2019, the Participant provides a certification in writing or via electronic media stating that they have insufficient liquid assets reasonably available to satisfy the financial need (unless the Employer has actual knowledge to the contrary),
· Continued reliance on IRS Announcement 2017-15 (related to Hurricane Maria and the California wildfires) for plans to allow hardship distributions on account of Hurricanes Florence and Michael.
What is the effective date of these provisions?
There are various effective dates. The changes to safe harbor hardship distribution rules for casualty and disaster can be effective as early as January 1, 2018. The mandatory elimination of deferral suspension, and the requirement of participant certification of financial need must be effective no later than for hardship distributions after January 1, 2020. Many other changes, such as the expansion of sources for hardship distributions, can be effective as early as the first day of the 2019 plan year.
Can Plan Sponsors rely upon their adoption of administrative changes implementing the proposed hardship regulations?
The final regulations are substantially similar to the proposed regulations, and plans that complied with the proposed regulations will satisfy the final regulations.
When does the hardship amendment need to be adopted?
The most conservative interpretation of the Final Regulations holds that a 401(k) Plan Sponsor using a preapproved plan document (such as a volume submitter) must adopt the final hardship amendment by its tax filing deadline, including extensions, for its tax year which includes the date any of the provisions (other than rules related to casualty and disaster losses) were put in effect. (If the employer is a calendar year taxpayer, and the employer put the new rules in place during 2019, this means the deadline is the extended due date of the 2019 return.) FIS continues to seek clarification of these amendment deadlines and will provide future updates as they become available from the IRS. For individually designed plans, the deadline will be December 31, 2021, assuming the final regulations appear on the 2019 Required Amendments List.
Please note: These dates do not apply to 403(b) plan hardship amendments, which have a due date as of the end of the calendar year after the calendar year in which the change in § 403(b) Requirements was effective with respect to the plan. For those plans that adopted hardship provision changes in 2019, the effective date for the hardship amendment will be December 31, 2020.
When will the final hardship amendment be ready for FIS clients?
FIS continues to review the Final Regulations and will complete a final hardship amendment as soon as possible for our clients. We will communicate the availability of this amendment in a separate release when complete. At this time, we anticipate producing a hardship amendment for our clients’ use prior to October 31, 2019.
In addition to the hardship amendment, FIS will prepare the language necessary for the SPD/SMM and annual notice requirements and will alert clients to their availability as well.
Was a previous “good faith” hardship amendment provided for FIS clients?
Earlier this year, FIS completed a “good faith” amendment to apply the proposed regulations in the narrow circumstance where a Plan had terminated in 2018 or 2019. The expectation is that any Plans terminating after the final hardship amendment is finalized will use the final hardship amendment.
Will document providers be able to sign the amendment on behalf of their employer-clients?
Yes. At present, FIS plans to provide two versions of the amendment, one for an individual employer/plan sponsor, and one for volume submitter practitioners to sign on behalf of their clients.
Will the hardship amendment provision changes discussed above be incorporated into the Cycle 3 plan documents?
No. The completed hardship amendment will be a separate amendment that survives a Plan’s restatement on to the Cycle 3 documents (as applicable). However, any required language changes to the wording of the SPD/SMM, and annual notices will be incorporated into those materials.
-----------------------------------------------------------------------
Adv. Plan Design/Cross-testing and Adv. 401(k) Topics Workshops
Back-to-back: Kansas City on Oct 31-Nov 1; Appleton on Nov 4-5; Charlotte on Nov 18-19
7 CE credits for each one-day workshop. Details and online registration.
Orlando Advanced Pension Conference – February 5-7, 2020 – Agenda Announced!
Hard Rock Hotel at Universal Orlando
View the Complete Agenda and list of presenters.
Attendees can earn up to 19 hours of CE credits.
Program details and online registration will be available within the next few days, here.
Pensions on Peachtree – May 4-5, 2020 - Save the Dates!
15 hours of CE credits, including 2 Ethics credits. Details and online registration will be available in February 2020, here.
Chicago Advanced Pension Conference – September 2-4, 2020 – Save the dates
Hyatt Centric Magnificent Mile. Attendees can earn up to 19 hours of CE credits.
Details and online registration will be available in May 2020, here.
|
