Hardship Distributions of Elective Contributions, Qualified Matching Contributions, Qualified Nonelective Contributions, and Earnings
| Published date | 23 September 2019 |
| Citation | 84 FR 49651 |
| Record Number | 2019-20511 |
| Section | Rules and Regulations |
| Court | Internal Revenue Service |
Federal Register, Volume 84 Issue 184 (Monday, September 23, 2019)
[Federal Register Volume 84, Number 184 (Monday, September 23, 2019)]
[Rules and Regulations]
[Pages 49651-49659]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20511]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9875]
RIN-1545-BO82
Hardship Distributions of Elective Contributions, Qualified
Matching Contributions, Qualified Nonelective Contributions, and
Earnings
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations that amend the rules
relating to hardship distributions from section 401(k) plans. The final
regulations reflect statutory changes affecting section 401(k) plans,
including changes made by the Bipartisan Budget Act of 2018. The
regulations affect participants in, beneficiaries of, employers
maintaining, and administrators of plans that include cash or deferred
arrangements or provide for employee or matching contributions.
DATES:
Effective Date: These regulations are effective September 23, 2019.
Applicability Date: For dates of applicability, see Sec. 1.401(k)-
1(d)(3)(v).
FOR FURTHER INFORMATION CONTACT: Roger Kuehnle at (202) 317-4148 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545-1669. The collection of information
in these final regulations is in Sec. 1.401(k)-1(d)(3)(iii)(B). The
collection of information relates to the certification by participants
in section 401(k) plans that they have insufficient cash or other
liquid assets reasonably available to cover expenses resulting from a
hardship and, thus, will need a distribution from the plan to meet the
expenses. The collection of information is required to obtain a
benefit.
The likely recordkeepers are individuals.
Estimated total annual reporting burden: 101,250 hours.
Estimated average annual burden per respondent: 45 minutes.
Estimated number of respondents: 135,000.
Estimated frequency of responses: On occasion.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Background
Section 401(k)
Section 401(k)(1) of the Internal Revenue Code (Code) provides that
a profit-sharing, stock bonus, pre-ERISA money purchase, or rural
cooperative plan will not fail to qualify under section 401(a) merely
because it includes a cash or deferred arrangement (CODA) that is a
qualified CODA. Under section 401(k)(2), a CODA (generally, an
arrangement providing for an election by an employee between
contributions to a plan or payments directly in cash) is a qualified
CODA only if it satisfies certain requirements. Section 401(k)(2)(B)
provides that contributions made pursuant to a qualified CODA (referred
to as ``elective contributions'') may be distributed only on or after
the occurrence of certain events, including death, disability,
severance from employment, termination of the plan, attainment of age
59\1/2\, hardship, or, in the case of a qualified reservist
distribution, the date a reservist is called to active duty. Section
401(k)(2)(C) requires that elective contributions be nonforfeitable at
all times.
Section 401(k)(3)(A)(ii) requires that elective contributions
satisfy the actual deferral percentage (ADP) test set forth in section
401(k)(3). Sections 401(k)(11), 401(k)(12), and 401(k)(13) each provide
an alternative method of meeting the ADP test. Under section
401(k)(3)(D), qualified nonelective contributions (QNECs) and qualified
matching contributions (QMACs), as described in sections 401(m)(4)(C)
and 401(k)(3)(D)(ii)(I), respectively, are permitted to be taken into
account under the ADP test. Among other requirements, QNECs and QMACs
must satisfy the distribution limitations of section 401(k)(2)(B) and
the nonforfeitability requirements of section 401(k)(2)(C). Similarly,
employer contributions that are made pursuant to the safe harbor plan
designs of section 401(k)(12) or (13) must meet the distribution
limitations of section 401(k)(2)(B).
Section 401(m)(2)(A) requires that matching contributions and
employee contributions satisfy the actual contribution percentage (ACP)
test set forth in section 401(m)(2). Sections 401(m)(10), 401(m)(11),
and 401(m)(12) each provide an alternative method of meeting the ACP
test with respect to matching contributions. As with contributions made
to section 401(k) plans pursuant to safe harbor plan designs, employer
contributions made pursuant to the safe harbor plan designs of section
401(m)(11) or (12) must meet the distribution limitations of section
401(k)(2)(B).
Existing Regulations Under Section 401(k)
The Department of the Treasury (Treasury Department) and the IRS
issued comprehensive regulations under sections 401(k) and 401(m) on
December 29, 2004 (TD 9169, 69 FR 78143). Since that time, the
regulations have been updated to reflect certain subsequent changes to
the applicable statute (see TD 9237, 71 FR 6, and TD 9324, 72 FR
[[Page 49652]]
21103, providing guidance on designated Roth contributions under
section 402A; and TD 9447, 74 FR 8200, providing guidance on section
401(k)(13)). Although the regulations have not been updated to reflect
other statutory changes, they have been amended to address certain
discrete issues unrelated to statutory changes (see TD 9319, 72 FR
16878, relating to the definition of compensation; TD 9641, 78 FR
68735, relating to mid-year amendments to safe harbor plan designs; and
TD 9835, 83 FR 34469, relating to whether QNECs and QMACs must be
nonforfeitable when contributed to the plan).
Section 1.401(k)-1(d)(3) provides rules for determining whether a
distribution is made on account of an employee's hardship. Under those
rules, a distribution is made on account of hardship only if the
distribution is made on account of an immediate and heavy financial
need and the amount of the distribution is not in excess of the amount
necessary to satisfy that need (plus any amounts necessary to pay any
taxes or penalties reasonably anticipated to result from the
distribution). These determinations must be made on the basis of all
the relevant facts and circumstances and in accordance with
nondiscriminatory and objective standards set forth in the plan.
Section 1.401(k)-1(d)(3)(iv)(B) provides that a distribution is not
treated as necessary to satisfy an immediate and heavy financial need
of an employee to the extent the need may be relieved from other
resources that are reasonably available to the employee (including
assets of the employee's spouse and minor children that are reasonably
available to the employee). Under Sec. 1.401(k)-1(d)(3)(iv)(C), in
determining whether the need can be relieved from other resources that
are reasonably available to an employee, the employer may rely on the
employee's representation (unless the employer has actual knowledge to
the contrary) that the need cannot reasonably be relieved from
resources specified in Sec. 1.401(k)-1(d)(3)(iv)(C).
To simplify administration, the regulations provide certain safe
harbors that may be used to determine whether a distribution is made on
account of an employee's hardship. Specifically, Sec. 1.401(k)-
1(d)(3)(iii)(B) provides a safe harbor under which distributions for
six types of expenses are deemed to be made on account of an immediate
and heavy financial need. One of the six types is ``expenses for the
repair of damage to the employee's principal residence that would
qualify for the casualty deduction under section 165 (determined
without regard to whether the loss exceeds 10% of adjusted gross
income).''
In addition, Sec. 1.401(k)-1(d)(3)(iv)(E) provides a safe harbor
under which a distribution is deemed necessary to satisfy an immediate
and heavy financial need. Under that safe harbor, an employee must
first obtain all currently available distributions (including
distributions of employee stock ownership plan (ESOP) dividends under
section 404(k), but not hardship distributions), and nontaxable plan
loans from the plan and any other plan maintained by the employer.
Under the safe harbor, an employee's ability to make elective
contributions and employee contributions to the plan (and any other
plan maintained by the employer) must be suspended for at least 6
months after receipt of the hardship distribution. Pursuant to Sec.
1.401(k)-3(c)(6)(v)(B), in the case of a safe harbor plan described in
section 401(k)(12) or (13), the suspension period may not exceed 6
months.
Under Sec. 1.401(k)-1(d)(3)(ii), the maximum amount that may be
distributed on account of hardship is the total of the employee's
elective contributions that have not previously been distributed (plus
earnings, QNECs, and QMACs credited before a specified grandfather date
that generally is before 1989). Thus, the maximum amount that may be
distributed on account of hardship does not include earnings, QNECs, or
QMACs that are not grandfathered.
Section 403(b)
Section 403(b)(7)(A)(ii) provides distribution limitations on
amounts contributed to a custodial account that is treated as a section
403(b) annuity contract. Section 403(b)(11) provides that contributions
made pursuant to a salary reduction agreement (within the meaning of
section 402(g)(3)(C)) (generally referred to in the regulations under
section 403(b) as ``section 403(b) elective deferrals'') may be
distributed only on or after the occurrence of certain events, one of
which is the employee's hardship. Section 403(b)(11) also provides that
no income attributable to these contributions may be distributed on
account of hardship.
Section 1.403(b)-6 provides rules for applying these distribution
limitations. Section 1.403(b)-6(b) applies to distributions of amounts
that are neither attributable to section 403(b) elective deferrals nor
made from custodial accounts, Sec. 1.403(b)-6(c) applies to
distributions from custodial accounts that are not attributable to
section 403(b) elective deferrals, and Sec. 1.403(b)-6(d) applies to
distributions of amounts attributable to section 403(b) elective
deferrals. Section 1.403(b)-6(d)(2) provides that a hardship
distribution of section 403(b) elective deferrals is subject to the
rules and restrictions set forth in Sec. 1.401(k)-1(d)(3) and is
limited to the aggregate dollar amount of a participant's section
403(b) elective deferrals, without earnings thereon.
Statutory Changes Relating to Section 401(k)
Section 41113 of the Bipartisan Budget Act of 2018, Public Law 115-
123 (BBA 2018), directs the Secretary of the Treasury to modify Sec.
1.401(k)-1(d)(3)(iv)(E) to (1) delete the 6-month prohibition on
contributions following a hardship distribution and (2) make any other
modifications necessary to carry out the purposes of section
401(k)(2)(B)(i)(IV). Section 41114 of BBA 2018 modified the hardship
distribution rules under section 401(k)(2)(B) by adding section
401(k)(14)(A) to the Code, which states that the maximum amount
available for distribution upon hardship includes (1) contributions to
a profit-sharing or stock bonus plan to which section 402(e)(3)
applies, (2) QNECs, (3) QMACs, and (4) earnings on these contributions.
Section 41114 of BBA 2018 also added section 401(k)(14)(B) to the Code,
which provides that a distribution is not treated as failing to be made
upon the hardship of an employee solely because the employee does not
take any available loan under the plan.
Section 11044 of the Tax Cuts and Jobs Act, Public Law 115-97
(TCJA), added section 165(h)(5) to the Code. Section 165(h)(5) provides
that, for taxable years 2018 through 2025, the deduction for a personal
casualty loss generally is available only to the extent the loss is
attributable to a federally declared disaster (as defined in section
165(i)(5)).
Section 826 of the Pension Protection Act of 2006, Public Law 109-
280 (PPA '06), directs the Secretary of the Treasury to modify the
rules relating to hardship distributions to permit a section 401(k)
plan to treat a participant's beneficiary under the plan the same as
the participant's spouse or dependent in determining whether the
participant has incurred a hardship. Notice 2007-7, 2007-5 I.R.B. 395,
provides guidance for applying this provision.
Section 827(a) of PPA '06 added to the Code section 72(t)(2)(G),
which exempts certain distributions from the application of the section
72(t) additional income tax on early distributions. These
distributions, made
[[Page 49653]]
during the period that a reservist has been called to active duty, are
referred to as ``qualified reservist distributions,'' and could include
distributions attributable to elective contributions. Section 827(b)(1)
of PPA '06 added section 401(k)(2)(B)(i)(V) to the Code, which permits
qualified reservist distributions to be made from a section 401(k)
plan.\1\
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\1\ While section 827(b)(2) and (3) of PPA '06 amended section
403(b)(7)(A)(ii) and (b)(11) to permit qualified reservist
distributions to be made from a section 403(b) plan, the regulations
under section 403(b) have not yet been updated to reflect these
statutory amendments.
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Section 105(b)(1)(A) of the Heroes Earnings Assistance and Relief
Tax Act of 2008, Public Law 110-245 (HEART Act), added section
414(u)(12) to the Code. Section 414(u)(12)(B)(ii) provides for a 6-
month suspension of elective contributions and employee contributions
after certain distributions to individuals performing service in the
uniformed services.
On November 14, 2018, the Treasury Department and the IRS published
proposed regulations (REG-107813-18) under section 401(k) and (m) in
the Federal Register (83 FR 56763). No public hearing was requested or
held. Seven comments on the proposed regulations were received during
the comment period. After consideration of the comments, the proposed
regulations are adopted as revised by this Treasury decision.
Summary of Comments and Explanation of Provisions
Overview
The final regulations update the section 401(k) and (m) regulations
to reflect: (1) The enactment of (a) sections 41113 and 41114 of BBA
2018, (b) sections 826 and 827 of PPA '06, and (c) section 105(b)(1)(A)
of the HEART Act; and (2) the application of the hardship distribution
rules in light of the modification to the casualty loss deduction rules
made by section 11044 of the TCJA. The final regulations are
substantially similar to the proposed regulations, and plans that
complied with the proposed regulations will satisfy the final
regulations.
Deemed Immediate and Heavy Financial Need
The final regulations, like the proposed regulations, modify the
safe harbor list of expenses in existing Sec. 1.401(k)-1(d)(3)(iii)(B)
for which distributions are deemed to be made on account of an
immediate and heavy financial need by: (1) Adding ``primary beneficiary
under the plan'' as an individual for whom qualifying medical,
educational, and funeral expenses may be incurred; (2) modifying the
expense listed in existing Sec. 1.401(k)-1(d)(3)(iii)(B)(6) (relating
to damage to a principal residence that would qualify for a casualty
deduction under section 165) to provide that for this purpose the
limitations in section 165(h)(5) (added by section 11044 of the TCJA)
do not apply; and (3) adding a new type of expense to the list,
relating to expenses incurred as a result of certain disasters.
Several commenters observed that this new safe harbor expense,
which is described in the preamble to the proposed regulations as
similar to relief provided by the IRS after certain major federally
declared disasters, is narrower in certain respects than this past IRS
relief and asked for confirmation that the narrowing is intentional.
Some commenters also raised the concern that the new safe harbor
expense would lead the IRS to discontinue its practice of issuing
announcements providing such relief. The effect of the new safe harbor
expense differs from the disaster-relief announcements in three main
respects.
First, only disaster-related expenses and losses of an employee who
lived or worked in the disaster area will qualify for the new safe
harbor expense, and not, as under the disaster-relief announcements,
expenses and losses of the employee's relatives and dependents. The
Treasury Department and IRS have concluded that limiting distributions
only to those employees directly affected by a disaster is consistent
with the purposes underlying the Code's hardship distribution
provisions and better aligns with the relief given to affected
individuals under section 7508A for similar disasters.
Second, unlike under the disaster-relief announcements, there is no
specific deadline by which a request for a disaster-related hardship
distribution must be made and no specific authority to relax certain
procedural requirements established by the plan administrator or plan
terms (although it is expected that plan administrators will be
flexible in interpreting plan terms requiring documentation relating to
the hardship when processing hardship distribution requests during the
difficult circumstances following a disaster).
Third, unlike under the disaster-relief announcements, there is no
extended deadline for plan sponsors to add disaster-related
distribution or loan provisions to the plan. In the absence of such an
extended deadline, a plan sponsor that does not choose to add disaster-
related hardship distribution provisions as part of an amendment
reflecting the final regulations but instead chooses to wait until a
disaster occurs to add those provisions (or to add a loan provision)
would need to adopt a plan amendment by the end of the plan year the
amendment is first effective.
Making expenses related to certain disasters a safe harbor expense
is intended to eliminate any delay or uncertainty concerning access to
plan funds that might otherwise occur following a major disaster.
Accordingly, the Treasury Department and IRS expect that no more
disaster-relief announcements will be needed. However, the Treasury
Department and IRS are considering separate guidance to address delayed
amendment deadlines when the new safe harbor expense or loan provisions
are added to a plan at a later date in response to a particular
disaster.
Distribution Necessary To Satisfy Financial Need
Pursuant to sections 41113 and 41114 of BBA 2018, the final
regulations, like the proposed regulations, modify the rules for
determining whether a distribution is necessary to satisfy an immediate
and heavy financial need by eliminating (1) any requirement that an
employee be prohibited from making elective contributions and employee
contributions after receipt of a hardship distribution and (2) any
requirement to take plan loans prior to obtaining a hardship
distribution. In particular, the final regulations, like the proposed
regulations, eliminate the safe harbor in existing Sec. 1.401(k)-
1(d)(3)(iv)(E), under which a distribution is deemed necessary to
satisfy the financial need only if elective contributions and employee
contributions are suspended for at least 6 months after a hardship
distribution is made and, if available, nontaxable plan loans are taken
before the hardship distribution is made.
The proposed regulations eliminate the rules in existing Sec.
1.401(k)-1(d)(3)(iv)(B) (under which the determination of whether a
distribution is necessary to satisfy a financial need is based on all
the relevant facts and circumstances) and provide one general standard
for determining whether a distribution is necessary. Under this general
standard, a hardship distribution may not exceed the amount of an
employee's need (including any amounts necessary to pay any federal,
state, or local income taxes or penalties reasonably anticipated to
result from the distribution), the employee must have obtained other
available, non-hardship distributions under the employer's
[[Page 49654]]
plans, and the employee must provide a representation that he or she
has insufficient cash or other liquid assets available to satisfy the
financial need. A hardship distribution may not be made if the plan
administrator has actual knowledge that is contrary to the
representation. These modifications are adopted in the final
regulations with the changes described later in this preamble relating
to employee representations and the type of plans subject to the
prohibition on suspensions.
Two commenters asked that ESOP dividends under section 404(k) be
excepted from the requirement that an employee must first obtain other
currently available distributions under the employer's plans.
Alternatively, they asked that plans be permitted to disregard that
distribution requirement with respect to those dividends if the
dividends are less than a specified dollar amount. The comments appear
to reflect a misinterpretation of the breadth of the distribution
requirement. Under both the existing regulations and the proposed
regulations, the distribution requirement applies only to distributions
that are ``currently available,'' which significantly limits the ESOP
dividends subject to the rule. Specifically, the only ESOP dividends
that must be distributed under this rule are those that, at the time of
the employee's hardship withdrawal request, both (1) have been paid to
the plan and (2) are available for the employee to elect to receive in
cash. Thus, for example, if an ESOP requires a participant to make an
irrevocable election whether to receive a dividend by a deadline that
is in advance of the dividend payment date, then a participant who does
not elect to receive the dividend by that deadline and who later
requests a hardship distribution has no dividends currently available.
Although in some instances these ESOP dividend amounts may be small
and, if distributed, would have a minimal impact on alleviating a
hardship, the Treasury Department and IRS have concluded that ESOP
dividends should not be treated differently than any other nonhardship
distributions that are currently available under the plan. Accordingly,
no changes were made in response to these comments.
One commenter was concerned that the requirement for an employee to
make a representation regarding the unavailability of cash or other
liquid assets to satisfy the financial need would be a problem if the
employee has those assets but has another immediate need for them. In
response to the comment, the final regulations provide that the
employee representation only relates to whether the employee has cash
or other liquid assets that are ``reasonably available'' to satisfy the
need. Thus, an employee could make a representation that he or she has
insufficient cash or other liquid assets reasonably available to
satisfy a financial need even if the employee did have cash or other
liquid assets on hand, provided those assets were earmarked for payment
of an obligation in the near future (for example, rent).
The proposed regulations provide that the employee representation
may be made ``in writing, by an electronic medium, or in such other
form as may be prescribed by the Commissioner.'' One commenter asked
for clarification that a verbal representation via telephone could be
used if it is recorded. The final regulations clarify that this method
is acceptable, by referencing the definition of ``electronic medium''
at Sec. 1.401(a)-21(e)(3).
Two commenters asked for clarification of the requirement that a
plan administrator not have ``actual knowledge'' that is contrary to an
employee's representation or, alternatively, they asked that the
requirement be eliminated. The requirement does not impose upon plan
administrators an obligation to inquire into the financial condition of
employees who seek hardship distributions. Rather, the rule is limited
to situations in which the plan administrator already possesses
sufficiently accurate information to determine the veracity of an
employee representation. The Treasury Department and IRS believe the
requirement helps ensure the integrity of the procedures used to
determine whether a distribution is necessary to satisfy an employee's
financial need. Accordingly, the final regulations retain the actual-
knowledge requirement.
The final regulations, like the proposed regulations, provide that
a plan generally may provide for additional conditions, such as those
described in 26 CFR 1.401(k)-1(d)(3)(iv)(B) and (C) (revised as of
April 1, 2019), to demonstrate that a distribution is necessary to
satisfy an immediate and heavy financial need of an employee. However,
like the proposed regulations, the final regulations do not permit a
plan to provide for a suspension of elective contributions or employee
contributions as a condition of obtaining a hardship distribution. This
is responsive to Congress' concern in enacting section 41113 of BBA
2018 that a suspension impedes an employee's ability to replace
distributed funds. See the Ways and Means Committee description of
section 1503 of H.R. 1,\2\ which became section 41113 of BBA 2018.
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\2\ H.R. Rep. No. 115-409, at 196 (2017).
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One commenter asked what conditions, besides those listed in
existing Sec. 1.401(k)-1(d)(3)(iv)(B) and (C) (other than a suspension
of contributions), could be imposed on a hardship distribution,
suggesting that completing a plan's application process and providing
required documentation should be permissible conditions. The Treasury
Department and IRS agree that these two conditions are permissible. The
Treasury Department and IRS also note that plan sponsors have available
a broad range of conditions that may be imposed on a hardship
distribution; for example, a plan could provide for a
nondiscriminatory, minimum dollar amount for a hardship distribution.
Another commenter recommended that the prohibition on suspensions
of elective contributions and employee contributions in the proposed
regulations be eliminated and plan sponsors be given the flexibility to
impose a suspension. However, in light of Congress' expressed concern
that a suspension impedes an employee's ability to replace distributed
funds, the final regulations retain the prohibition on suspensions.
Another commenter requested guidance on which other plans of the
employer, besides the plan making the hardship distribution, are
subject to the prohibition on suspensions. Although the existing safe
harbor in Sec. 1.401(k)-1(d)(3)(iv)(E)(2) imposes a mandatory
suspension with respect to all qualified and nonqualified plans
maintained by the employer, the proposed regulations do not specify the
plans to which the prohibition on suspensions applies. The Treasury
Department and IRS have concluded that Congress' concerns underlying
section 41113 of BBA 2018 have little relevance to unfunded
nonqualified plans. Accordingly, the final regulations provide that the
prohibition on suspensions applies only to a qualified plan, a section
403(b) plan, and an eligible deferred compensation plan described in
section 457(b) maintained by an eligible employer described in section
457(e)(1)(A). Thus, a plan subject to section 409A may retain its
suspension provisions (or, to the extent consistent with section 409A
and the regulations thereunder, the plan may be amended to remove
them).
Another commenter requested guidance on the continuing
applicability of revenue rulings that require a ``substantial
limitation'' on the right of a participant to withdraw
[[Page 49655]]
matched employee contributions, such as a suspension of contributions.
See, for example, Rev. Rul. 74-56, 1974-1 C.B. 90. Under the final
regulations, if, on or after January 1, 2020, matched employee
contributions are distributed in conjunction with a hardship
distribution of elective contributions, a suspension of employee
contributions is not permitted.\3\
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\3\ Issues relating to the applicability of prior revenue
rulings to distributions of matched employee contributions not made
in conjunction with a hardship distribution of elective
contributions are beyond the scope of these regulations.
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Expanded Sources for Hardship Distributions
Pursuant to section 41114 of BBA 2018, the final regulations, like
the proposed regulations, modify existing Sec. 1.401(k)-1(d)(3) to
permit hardship distributions from section 401(k) plans of elective
contributions, QNECs, QMACs, and earnings on these amounts, regardless
of when contributed or earned.
Several commenters asked how the new distribution rules apply to
safe harbor contributions made to a plan described in section
401(k)(12). Because safe harbor contributions made to a plan described
in section 401(k)(12) are either QNECs or QMACs, amounts attributable
to these contributions may be distributed on account of hardship. As
noted in the preamble to the proposed regulations, safe harbor
contributions made to a plan described in section 401(k)(13) may also
be distributed on account of an employee's hardship (because these
contributions are subject to the same distribution limitations
applicable to QNECs and QMACs). See Sec. 1.401(k)-3(k)(3)(i). However,
a plan may limit the type of contributions available for hardship
distributions and may exclude earnings on those contributions from
hardship distribution eligibility.
Section 403(b) Plans
Section 1.403(b)-6(d)(2) provides that a hardship distribution of
section 403(b) elective deferrals is subject to the rules and
restrictions set forth in Sec. 1.401(k)-1(d)(3); accordingly, the
preamble to the proposed regulations states that the new rules relating
to a hardship distribution of elective contributions from a section
401(k) plan generally apply to section 403(b) plans. Two commenters
asked whether, in light of historical concerns about employee self-
certification in section 403(b) plans, the employee-representation
requirement applies to section 403(b) plans. Because this requirement
is retained in the final regulations, at Sec. 1.401(k)-
1(d)(3)(iii)(B), it applies to section 403(b) plans.
The preamble to the proposed regulations addresses other issues
related to hardship distributions under section 403(b) plans, and
states that because Code section 403(b)(11) was not amended by section
41114 of BBA 2018, income attributable to section 403(b) elective
deferrals continues to be ineligible for distribution on account of
hardship. As also stated in that preamble, amounts attributable to
QNECs and QMACs may be distributed from a section 403(b) plan on
account of hardship only to the extent that, under Sec. 1.403(b)-6(b)
and (c), hardship is a permitted distributable event for amounts that
are not attributable to section 403(b) elective deferrals. Thus, QNECs
and QMACs in a section 403(b) plan that are not in a custodial account
may be distributed on account of hardship, but QNECs and QMACs in a
section 403(b) plan that are in a custodial account continue to be
ineligible for distribution on account of hardship.
Applicability Dates
The changes to the hardship distribution rules made by BBA 2018 are
effective for plan years beginning after December 31, 2018. The final
regulations provide plan sponsors with a number of applicability-date
options. Although presented differently in the proposed regulations,
the options available to plan sponsors under the final regulations are
the same as those available under the proposed regulations.
In response to a comment on the proposed regulations requesting
clarity regarding which rules apply during 2019, the final regulations
provide that Sec. 1.401(k)-1(d)(3) applies to distributions made on or
after January 1, 2020 (rather than, as in the proposed regulations, to
distributions made in plan years beginning after December 31, 2018).
However, Sec. 1.401(k)-1(d)(3) may be applied to distributions made in
plan years beginning after December 31, 2018, and the prohibition on
suspending an employee's elective contributions and employee
contributions as a condition of obtaining a hardship distribution may
be applied as of the first day of the first plan year beginning after
December 31, 2018, even if the distribution was made in the prior plan
year. Thus, for example, a calendar-year plan that provides for
hardship distributions under the pre-2019 safe harbor standards may be
amended to provide that an employee who receives a hardship
distribution in the second half of the 2018 plan year will be
prohibited from making contributions only until January 1, 2019 (or may
continue to provide that contributions will be suspended for the
originally scheduled 6 months).
If the choice is made to apply Sec. 1.401(k)-1(d)(3) to
distributions made before January 1, 2020, the new rules requiring an
employee representation and prohibiting a suspension of contributions
may be disregarded with respect to those distributions. To the extent
early application of Sec. 1.401(k)-1(d)(3) is not chosen, the rules in
Sec. 1.401(k)-1(d)(3), prior to amendment by this Treasury decision,
apply to distributions made before January 1, 2020, taking into account
statutory changes effective before 2020 that are not reflected in that
regulation.
In addition, the revised list of safe harbor expenses may be
applied to distributions made on or after a date that is as early as
January 1, 2018. Thus, for example, a plan that made hardship
distributions relating to casualty losses deductible under section 165
without regard to the changes made to section 165 by the TCJA (which,
effective in 2018, require that, to be deductible, losses must result
from a federally declared disaster) may be amended to apply the revised
safe harbor expense relating to casualty losses to distributions made
in 2018, so that plan provisions will conform to the plan's operation.
Similarly, a plan may be amended to apply the revised safe harbor
expense relating to losses (including loss of income) incurred by an
employee on account of a disaster that occurred in 2018, provided that
the employee's principal residence or principal place of employment at
the time of the disaster was located in an area designated by the
Federal Emergency Management Agency for individual assistance with
respect to the disaster.
Plan Amendments
The Treasury Department and IRS expect that plan sponsors will need
to amend their plans' hardship distribution provisions to reflect the
final regulations, and any such amendment must be effective for
distributions beginning no later than January 1, 2020. The deadline for
amending a disqualifying provision is set forth in Rev. Proc. 2016-37,
2016-29 I.R.B. 136. For example, with respect to an individually
designed plan that is not a governmental plan, the deadline for
amending the plan to reflect a change in qualification requirements is
the end of the second calendar year that begins after the issuance of
the Required Amendments List (RAL) described in
[[Page 49656]]
section 9 of Rev. Proc. 2016-37 that includes the change; if the final
regulations are included in the 2019 RAL, the deadline will be December
31, 2021.
A plan provision that does not result in the failure of the plan to
satisfy the qualification requirements, but is integrally related to a
qualification requirement that has been changed in a manner that
requires the plan to be amended, may be amended by the same deadline
that applies to the required amendment. The Treasury Department and IRS
have determined that a plan amendment modifying a plan's hardship
distribution provisions that is effective no later than the required
amendment, including a plan amendment reflecting one or more of the
following, will be treated as amending a provision that is integrally
related to a qualification requirement that has been changed: (1) The
change to section 165 (relating to casualty losses); (2) the addition
of the new safe harbor expense (relating to expenses incurred as a
result of certain federally declared disasters); and (3) the extension
of the relief under Announcement 2017-15, 2017-47 I.R.B. 534, to
victims of Hurricanes Florence and Michael that was provided in the
preamble to the proposed regulations. Thus, in the case of an
individually designed plan, the deadline for such an integrally related
amendment will be the same as the deadline for the required amendment
(described in the preceding paragraph), even if some of the amendment
provisions have an earlier effective date.
Several commenters requested guidance on amendment deadlines for
pre-approved plans. The deadline for adopting a required amendment (as
well as any integrally related amendment) to a pre-approved plan is set
forth in section 15 of Rev. Proc. 2016-37, and varies depending on
several factors, including the type of entity sponsoring the plan and
the period used for the plan year. For example, under Rev. Proc. 2016-
37, in the case of an employer with a calendar-year tax year that
maintains a pre-approved plan with a calendar-year plan year and that
chose to apply the new safe harbor expense for certain disasters in
2018, the deadline to adopt such an interim amendment for the new
expense would be the tax-filing deadline (plus extensions) for 2018.
The Treasury Department and IRS recognize that, for an employer using a
pre-approved plan, the interim amendment deadline under Rev. Proc.
2016-37 that applies for an amendment to a plan provision that is
integral to the qualification requirement that has been changed may be
earlier than the interim amendment deadline for the required amendment.
Accordingly, the Treasury Department and IRS are extending the deadline
for an interim amendment related to the hardship distribution
provisions. Under this extension, for an employer using a pre-approved
plan, the interim amendment deadline for the required amendment to the
hardship distribution provisions of the plan will also be the deadline
for all amendments integrally related to the hardship distribution
provisions (rather than the earlier deadline that might otherwise apply
under Rev. Proc. 2016-37 to those integrally related amendments). Thus,
if the employer in the example in this paragraph were to implement the
prohibition on suspensions effective for distributions made on or after
January 1, 2020, the interim amendment deadline to add the new safe
harbor expense would be the same as the deadline for the required
amendment (that is, the tax-filing deadline (plus extensions) for
2020), even if the new safe harbor expense is effective in an earlier
year.
Several commenters also requested guidance on the amendment
deadlines for pre-approved and individually designed section 403(b)
plans. Under Rev. Proc. 2017-18, 2017-5 I.R.B. 743, the remedial
amendment deadline for a section 403(b) plan is March 31, 2020. The
Treasury Department and IRS are considering providing for a later
amendment deadline for the amendments relating to the final regulations
in separate guidance.
Other Issues
Several commenters requested that the Internal Revenue Manual (IRM)
be updated to reflect the new hardship distribution rules. The IRS
intends to update the IRM to reflect the new rules in the final
regulations after publication of the final regulations.
Two commenters asked whether a plan must include every one of the
seven expenses in the Sec. 1.401(k)-1(d)(3)(ii)(B) list of deemed
immediate and heavy financial needs and cover every individual
described in the list (for example, a primary beneficiary under the
plan, in the case of certain expenses) in order to be considered as
using the safe harbor standards for hardship distributions. Under the
IRS's pre-approved plan program for qualified plans, certain section
401(k) plans that provide for hardship distributions will not be
approved unless the distributions are made under circumstances
described in the safe harbor standards in the regulations under section
401(k). For this purpose, a plan making hardship distributions for some
but not all the safe harbor expenses, or for expenses of some but not
all the categories of individuals described in Sec. 1.401(k)-
1(d)(3)(ii)(B), is considered to be using the safe harbor standards for
hardship distributions.
One commenter asked whether the proposed regulations' prohibition
on suspensions of elective contributions and employee contributions
applies to pre-approved section 403(b) plans in light of the fact that
the IRS's rules for pre-approved section 403(b) plans require that a
participant's elective deferrals be suspended for 6 months following a
hardship distribution. The prohibition on suspensions is retained in
the final regulations, and the rule applies to section 403(b) plans,
including pre-approved section 403(b) plans.
Also, one commenter asked for relief relating to the notice
requirements for safe harbor plans described in sections 401(k)(12) and
401(k)(13). Because a description of withdrawal provisions is required
to be included in the notice provided to eligible employees (see Sec.
1.401(k)-3(d)(2)(ii)(G)), if a description of the new hardship
withdrawal provisions was not already included in a notice, employees
must be provided an updated notice reflecting the new hardship
withdrawal provisions and must be given a reasonable opportunity to
change their cash or deferred election. See section III.C of Notice
2016-16, 2016-7 I.R.B. 318, for the notice-timing and election-
opportunity requirements with respect to mid-year amendments to safe
harbor plans.
Special Analyses
These regulations are not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Treasury Department and the Office of Management
and Budget regarding review of tax regulations.
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that the collection of information in these
regulations will not have a significant economic impact on a
substantial number of small entities. This certification is based on
the fact that employers with section 401(k) plans that permit hardship
withdrawals must already maintain records relating to an employee's
application for a hardship withdrawal, and the incremental cost due to
the new certification requirement in final regulations Sec. 1.401(k)-
1(d)(3)(iii)(B)(2) will be minimal. In addition, some employers,
including some small entities, use a hardship withdrawal procedure
available under the existing
[[Page 49657]]
regulations that requires an employee certification almost identical to
that in the final regulations. Therefore, a regulatory flexibility
analysis under the Regulatory Flexibility Act is not required. Pursuant
to section 7805(f) of the Code, the notice of proposed rulemaking
preceding these regulations was submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small businesses, and no comment was received.
Drafting Information
The principal author of these regulations is Roger Kuehnle of the
Office of Associate Chief Counsel (Employee Benefits, Exempt
Organizations, and Employment Taxes). However, other personnel from the
IRS and Treasury Department participated in their development.
Statement of Availability of IRS Documents
The IRS notices, revenue procedures and other guidance cited in
this preamble are published in the Internal Revenue Bulletin (or
Cumulative Bulletin) and are available from the Superintendent of
Documents, U.S. Government Publishing Office, Washington, DC 20402, or
by visiting the IRS website at http://www.irs.gov.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 401(m)(9) and 26 U.S.C. 7805.
* * * * *
0
Par. 2. Section 1.401(k)-0 is amended under the heading Sec. 1.401(k)-
1 by revising the entries for (d)(3)(ii) and (d)(3)(ii)(A) and (B),
adding an entry for (d)(3)(ii)(C), revising the entries for (d)(3)(iii)
and (d)(3)(iii)(A) and (B), adding an entry for (d)(3)(iii)(C),
revising the entry for (d)(3)(iv), removing the entries for
(d)(3)(iv)(A) through (F), revising the entry for (d)(3)(v), and adding
the entries for (d)(3)(v)(A) through (C) to read as follows:
Sec. 1.401(k)-0 Table of contents.
* * * * *
Sec. 1.401(k)-1 Certain cash or deferred arrangements.
* * * * *
(d) * * *
(3) * * *
(ii) Immediate and heavy financial need.
(A) In general.
(B) Deemed immediate and heavy financial need.
(C) Primary beneficiary under the plan.
(iii) Distribution necessary to satisfy financial need.
(A) Distribution may not exceed amount of need.
(B) No alternative means reasonably available.
(C) Additional conditions.
(iv) Commissioner may expand standards.
(v) Applicability date.
(A) General rule.
(B) Options for earlier application.
(C) Certain rules optional in 2019.
* * * * *
0
Par. 3. Section 1.401(k)-1 is amended by:
0
1. Revising paragraphs (d)(1)(ii) and (iii) and adding new paragraph
(d)(1)(iv).
0
2. Removing paragraph (d)(3)(ii) and redesignating paragraphs
(d)(3)(iii), (iv), and (v) as paragraphs (d)(3)(ii), (iii), and (iv).
0
3. Revising newly redesignated paragraph (d)(3)(ii)(B) and adding new
paragraph (d)(3)(ii)(C).
0
4. Revising newly redesignated paragraphs (d)(3)(iii) and (iv) and
adding new paragraph (d)(3)(v).
0
5. In paragraph (d)(6), removing Examples 3, 4, and 5, redesignating
Example 6 as Example 3, and designating Examples 1 through 3 as
paragraphs (d)(6)(i) through (iii).
0
6. In newly designated paragraph (d)(6)(ii), redesignating paragraphs
(d)(6)(ii)(i) and (ii) as paragraphs (d)(6)(ii)(A) and (B).
The additions and revisions read as follows:
Sec. 1.401(k)-1 Certain cash or deferred arrangements.
* * * * *
(d) * * *
(1) * * *
(ii) In the case of a profit-sharing, stock bonus or rural
cooperative plan--
(A) The employee's attainment of age 59\1/2\; or
(B) In accordance with section 401(k)(14), the employee's hardship;
(iii) In accordance with section 401(k)(10), the termination of the
plan; or
(iv) In the case of a qualified reservist distribution defined in
section 72(t)(2)(G)(iii), the date the reservist was ordered or called
to active duty.
* * * * *
(3) * * *
(ii) * * *
(B) Deemed immediate and heavy financial need. A distribution is
deemed to be made on account of an immediate and heavy financial need
of the employee if the distribution is for--
(1) Expenses for (or necessary to obtain) medical care that would
be deductible under section 213(d), determined without regard to the
limitations in section 213(a) (relating to the applicable percentage of
adjusted gross income and the recipients of the medical care) provided
that, if the recipient of the medical care is not listed in section
213(a), the recipient is a primary beneficiary under the plan;
(2) Costs directly related to the purchase of a principal residence
for the employee (excluding mortgage payments);
(3) Payment of tuition, related educational fees, and room and
board expenses, for up to the next 12 months of post-secondary
education for the employee, for the employee's spouse, child or
dependent (as defined in section 152 without regard to section
152(b)(1), (b)(2) and (d)(1)(B)), or for a primary beneficiary under
the plan;
(4) Payments necessary to prevent the eviction of the employee from
the employee's principal residence or foreclosure on the mortgage on
that residence;
(5) Payments for burial or funeral expenses for the employee's
deceased parent, spouse, child or dependent (as defined in section 152
without regard to section 152(d)(1)(B)), or for a deceased primary
beneficiary under the plan;
(6) Expenses for the repair of damage to the employee's principal
residence that would qualify for the casualty deduction under section
165 (determined without regard to section 165(h)(5) and whether the
loss exceeds 10% of adjusted gross income); or
(7) Expenses and losses (including loss of income) incurred by the
employee on account of a disaster declared by the Federal Emergency
Management Agency (FEMA) under the Robert T. Stafford Disaster Relief
and Emergency Assistance Act, Public Law 100-707, provided that the
employee's principal residence or principal place of employment at the
time of the disaster was located in an area designated by FEMA for
individual assistance with respect to the disaster.
(C) Primary beneficiary under the plan. For purposes of paragraph
(d)(3)(ii)(B) of this section, a ``primary beneficiary under the plan''
is an individual who is named as a beneficiary under the plan and has
an unconditional right, upon the death of the employee, to all or a
portion of the
[[Page 49658]]
employee's account balance under the plan.
(iii) Distribution necessary to satisfy financial need--(A)
Distribution may not exceed amount of need. A distribution is treated
as necessary to satisfy an immediate and heavy financial need of an
employee only to the extent the amount of the distribution is not in
excess of the amount required to satisfy the financial need (including
any amounts necessary to pay any federal, state, or local income taxes
or penalties reasonably anticipated to result from the distribution).
(B) No alternative means reasonably available. A distribution is
not treated as necessary to satisfy an immediate and heavy financial
need of an employee unless each of the following requirements is
satisfied--
(1) The employee has obtained all other currently available
distributions (including distributions of ESOP dividends under section
404(k), but not hardship distributions) under the plan and all other
plans of deferred compensation, whether qualified or nonqualified,
maintained by the employer;
(2) The employee has provided to the plan administrator a
representation in writing (including by using an electronic medium as
defined in Sec. 1.401(a)-21(e)(3)), or in such other form as may be
prescribed by the Commissioner, that he or she has insufficient cash or
other liquid assets reasonably available to satisfy the need; and
(3) The plan administrator does not have actual knowledge that is
contrary to the representation.
(C) Additional conditions. A plan generally may provide for
additional conditions, such as those described in 26 CFR 1.401(k)-
1(d)(3)(iv)(B) and (C) (revised as of April 1, 2019), to demonstrate
that a distribution is necessary to satisfy an immediate and heavy
financial need of an employee. For example, a plan may provide that,
before a hardship distribution may be made, an employee must obtain all
nontaxable loans (determined at the time a loan is made) available
under the plan and all other plans maintained by the employer. However,
a plan may not provide for a suspension of an employee's elective
contributions or employee contributions under any plan described in
section 401(a) or 403(a), any section 403(b) plan, or any eligible
governmental plan described in Sec. 1.457-2(f) as a condition of
obtaining a hardship distribution.
(iv) Commissioner may expand standards. The Commissioner may
prescribe additional guidance of general applicability, published in
the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of this
chapter), expanding the list of distributions deemed to be made on
account of immediate and heavy financial needs and setting forth
additional methods to demonstrate that a distribution is necessary to
satisfy an immediate and heavy financial need.
(v) Applicability date--(A) General rule. Except as otherwise
provided in this paragraph (d)(3)(v), the rules in this paragraph
(d)(3) apply to distributions made on or after January 1, 2020. For
distributions made before January 1, 2020, the rules in 26 CFR
1.401(k)-1(d)(3) (revised as of April 1, 2019) apply.
(B) Options for earlier application. The rules in this paragraph
(d)(3) may be applied to distributions made in plan years beginning
after December 31, 2018, and the last sentence of paragraph
(d)(3)(iii)(C) of this section (prohibiting the suspension of
contributions as a condition of obtaining a hardship distribution) may
be applied as of the first day of the first plan year beginning after
December 31, 2018, even if the distribution was made in the prior plan
year. Thus, for example, a calendar-year plan that provides for
hardship distributions under the rules in 26 CFR 1.401(k)-
1(d)(3)(iv)(E) (revised as of April 1, 2019) may be amended to provide
that an employee who receives a hardship distribution in the second
half of the 2018 plan year will be prohibited from making contributions
only until January 1, 2019 (or may continue to provide that
contributions will be suspended for the originally scheduled 6 months).
In addition, paragraph (d)(3)(ii)(B) of this section (listing
distributions deemed to be made on account of an immediate and heavy
financial need) may be applied to distributions made on or after a date
that is as early as January 1, 2018.
(C) Certain rules optional in 2019. If, in accordance with
paragraph (d)(3)(v)(B) of this section, the rules in this paragraph
(d)(3) are applied to distributions made before January 1, 2020, then
the rules in paragraphs (d)(3)(iii)(B)(2) and (3) of this section
(relating to an employee representation) and the last sentence of
paragraph (d)(3)(iii)(C) of this section (prohibiting the suspension of
contributions as a condition of obtaining a hardship distribution) may
be disregarded with respect to such distributions.
* * * * *
0
Par. 4. Section 1.401(k)-3 is amended by:
0
1. Revising paragraph (c)(6)(v).
0
2. Removing the language ``, and, in the case of a hardship
distribution, suspends an employee's ability to make elective
contributions for 6 months in accordance with Sec. 1.401(k)-
1(d)(3)(iv)(E)'' in the fifth sentence in paragraph (c)(7), Example
1(i).
0
3. Removing the second sentence in paragraph (j)(2)(iv).
The revision reads as follows:
Sec. 1.401(k)-3 Safe harbor requirements.
* * * * *
(c) * * *
(6) * * *
(v) Restrictions due to limitations under the Internal Revenue
Code. A plan may limit the amount of elective contributions made by an
eligible employee under a plan--
(A) Because of the limitations of section 402(g) or 415;
(B) Due to a suspension under section 414(u)(12)(B)(ii); or
(C) Because, on account of a hardship distribution made before
January 1, 2020, an employee's ability to make elective contributions
has been suspended for 6 months.
* * * * *
Sec. 1.401(k)-6 [Amended]
0
Par. 5. Section 1.401(k)-6 is amended by:
0
1. Removing the fourth sentence in paragraph (2) of the definition of
Eligible employee.
0
2. Removing the language ``, except as provided otherwise in Sec.
1.401(k)-1(c) and (d),'' in the definitions of Qualified matching
contributions (QMACs) and Qualified nonelective contributions (QNECs).
0
Par. 6. Section 1.401(m)-3 is amended by revising paragraph (d)(6)(v)
to read as follows:
Sec. 1.401(m)-3 Safe harbor requirements.
* * * * *
(d) * * *
(6) * * *
(v) Restrictions due to limitations under the Internal Revenue
Code. A plan may limit the amount of contributions made by an eligible
employee under a plan--
(A) Because of the limitations of section 402(g) or section 415;
(B) Due to a suspension under section 414(u)(12)(B)(ii); or
(C) Because, on account of a hardship distribution made before
January 1, 2020, an employee's ability to make
[[Page 49659]]
contributions has been suspended for 6 months.
* * * * *
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
Approved: September 5, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-20511 Filed 9-19-19; 4:15 pm]
BILLING CODE 4830-01-P
