Posted By: Christopher Ciminera, CPA
The world has gone through many sudden and unpredictable changes in the last few years. The retirement plan industry has seen many changes, as well, which has had impactful legislation and guidance that changed the retirement landscape in many positive ways. With all these changes, it seems the world and retirement plan industry is part of a storied Shakespearian plan in which we are waiting to find out if it’s a comedy or tragedy. Each bit of legislation and regulatory guidance seems to be an act of our play. The legislation and guidance have come at a quick pace, but this story starts in 2018, which is five years behind us already. Because of the fast-paced nature of the legislation and guidance, and the importance of these changes, I wanted to put together a blog series that covers each “Act” of our retirement play. I hope that this blog series will provide a refresher and summarize the most important aspects of the legislation and guidance. The blog series starts with our current blog, Act 1 of our play, which covers the Bipartisan Budget Act. We will then move on to Act 2, which covers the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Then Act 3, which will cover the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Act 4 will cover the recent update to the Employee Plans Compliance Resolution System (EPCRS). And lastly, Act 5 will cover the cybersecurity guidance from the Department of Labor. So now that the stage is set, let’s move to Act 1.
Act 1 – The Bipartisan Budget Act of 2018
Act 1 of our play starts with the Bipartisan Budget Act of 2018 which was signed into law on February 9, 2018. The Act makes changes to the hardship withdrawal rules primarily to expand access to retirement funds for those that have incurred a hardship.
Scene 1 – Hardship Withdrawal Legislation
As you may be aware, hardship withdrawals are allowed by legislation if the plan document permits such in-service withdrawals. A hardship withdrawal may only be taken by a participant for a deemed immediate and heavy financial need that the hardship withdrawal would satisfy. Relevant facts and circumstances determine if a hardship has occurred. The Internal Revenue Code provided safe harbor hardship circumstances that are deemed immediate and heavy which include certain medical expenses, costs relating to the purchase of a principal residence, tuition and related educational fees and expenses, payments necessary to prevent eviction from or foreclosure on a principal residence, burial or funeral expenses, and certain expenses for the repair of damage to the employee’s principal residence.
Scene 2 – Changes to Hardship Withdrawal Legislation
The Bipartisan Budget Act of 2018 made the following changes to the hardship withdrawal rules:
- Elimination of Six-Month Deferral Suspension – This provision requires plans to eliminate the six-month suspension of deferrals following a hardship withdrawal made on or after January 1, 2020. The elimination of the six-month suspension was optional for the 2019 plan year, so it could have been implemented early. However, this suspension became mandatory on January 1, 2020.
- Elimination of Plan Loan Requirement – Previously, a participant would be required to maximize a plan loan, if the plan allowed such provision, before taking a hardship withdrawal. The Act permits plans to eliminate this requirement that participants obtain all available plan loans prior to receiving a hardship withdrawal.
- Expansion of Allowable Sources – Additionally, the Act expanded the types of contribution sources available for a hardship withdrawal. Previously, only elective deferrals were an allowed source and did not include income earned on deferrals. With this expansion, hardship withdrawals may now be taken from elective deferral contributions, QNEC contributions, QMAC contributions, traditional safe harbor contributions, QACA safe harbor contributions, and earnings on those accounts. On an important note, 403(b) plan accounts have more restrictive requirements. Earnings on 403(b) elective deferrals continue to be ineligible for a hardship withdrawal. Additionally, QNECs and QMACs in a 403(b) plan are eligible to be used for hardship withdrawals.
- Clarification of Casualty Loss Provision – The previous regulations also permitted a hardship withdrawal for a casualty loss that fell under Code Section 165. The Tax Cuts and Jobs Act of 2017 changed this section to allow deductions only for casualty losses incurred in connection with a federally declared disaster. Since the hardship withdrawal regulations referenced the tax code, it was unclear whether the safe harbor definition of hardship had automatically changed to eliminate hardship withdrawals for casualties that were not connected to a federally declared disaster. The Act clarified that the Tax Act change does not apply to hardship withdrawals. Therefore, hardship withdrawals for expenses to repair damage to the participant’s principal residence are permitted event if they are not the result of a federally declared disaster.
- Addition of Deemed Hardship Circumstance – Additionally, the Act added expenses and losses incurred on account of a disaster declared by FEMBA to the safe harbor definition of a hardship, provided that the employee’s principal residence or principal place of employment at the time of the disaster was located in the area designated by FEMA for individual assistance.
- Determination of Hardship Need – Effective January 1, 2020, the determination of whether a distribution is necessary to satisfy the need includes: a hardship withdrawal not exceeding the amount of the employee’s need (including any necessary taxes), the employee shall first obtain other available distributions, and the employee shall represent (in writing or an electronic medium) that he or she has insufficient cash or liquid assets “reasonably available” to satisfy the financial need. A plan administrator may rely on an employee’s representation so that the plan administrator is not required to inquire into a participant’s financial status.
And now we have come to the end of Act 1 of our play. The Bipartisan Budget Act of 2018 provided a benefit to participants by allowing access to additional retirement account sources and permitting contributions immediately after a hardship withdrawal is taken. This benefit was only a precursor to what was yet to come. Our next blog will cover Act 2, the SECURE Act. Stay tuned to hear what major changes occurred with this act.
Photo By: Jamin Gray (License)
