The IRS has issued final regulations reflecting changes made to the rules governing hardship withdrawals from 401(k) plans. The following summarizes the changes that a plan sponsor will need to make or consider.

Effective January 1, 2020, a plan may no longer suspend deferrals for those who receive a hardship distribution.  The prior regulations required a plan to suspend a participant’s deferral contributions for six months after taking a hardship distribution.

Also effective January 1, 2020, the regulations require any participant who applies for a hardship distribution to represent in writing that he or she has insufficient cash or other liquid assets available to satisfy the financial need.  The plan administrator cannot have any actual knowledge contrary to the representation.

The Regulations contain some optional provisions.  To take these into account, a plan sponsor will need to consider the following:

1. Whether to permit a participant to take a hardship withdrawal from earnings on deferral contributions.  The prior regulations only permit a participant to take a withdrawal from principal.  The new regulations allow a plan to permit a participant to take a hardship withdrawal from deferral earnings.
2. Whether a participant will still need to take any available plan loan before taking a hardship distribution.  Many plans currently require a participant to take any available loan before a hardship withdrawal.The new regulations will permit an amendment to remove the requirement.
3. Whether to allow a hardship distribution for expenses and losses incurred by the participant on account of a disaster declared by FEMA.The new regulations allow a plan to permit a disaster-related hardship withdrawal for a participant who is living or working within an area FEMA designates for individual assistance.
4. Whether to allow hardship distributions for medical care, tuition and burial or funeral expenses related to a primary plan beneficiary who is not a spouse, child or dependent.The new regulations formally acknowledge hardship eligibility for these primary beneficiary expenses.

Implementation of the above requires (i) a timely plan amendment, (ii) a summary of material modifications to the plan’s SPD or an updated SPD and (iii) a form of participant representation.