Almost a year after releasing proposed changes to the hardship distribution regulations, the IRS recently finalized the proposed rules. Although there were no major changes between the proposed rules and the final rules, the IRS responded to several public comments made on the proposed rules that are worth mentioning.

  • The IRS noted that the final regulations allow nonqualified deferred compensation plans that are subject to Section 409A to retain their suspension of deferrals provisions.
  • Employees can make a successful representation that they do not have the assets to cover an immediate and heavy financial need, even if the employee does have the cash on hand but those funds are meant to cover an obligation in the future, such as rent.
  • The IRS clarified that employee representations can be made via a phone call, as long as the call is recorded.
  • The IRS also clarified that retirement plans can require a minimum dollar amount for a hardship distribution as long as the minimum is non-discriminatory.

Plan Amendments

Plans will need to be amended to reflect the final regulations. Individually designed plans must be amended no later than December 31, 2021, assuming the final regulations are included on the 2019 Remedial Amendment List. Pre-approved plans should generally be amended no later than the due date of the plan sponsor’s tax return deadline (including extensions) for the 2020 tax year.

403(b) plans must be amended no later than March 31, 2020, which is the remedial amendment deadline for 403(b) plans, but the regulations indicate that this date is subject to change as the IRS may issue an extension.

For further information on the hardship regulations, see our article about the proposed regulations. If you have any questions, please contact your account representative at Nyhart for more information.