On September 19, 2019, the Internal Revenue Service released final regulations for hardship withdrawals from 401(k) and 403(b) plans, addressing changes made by the Bipartisan Budget Act of 2018 and The Tax Cuts and Jobs Act of 2017. These final regulations are substantially similar to the IRS proposed regulations. The final hardship regulations are effective for hardship distributions made on or after January 1, 2020.
As noted above, current regulations permit a hardship withdrawal generally for a “casualty loss” as defined under Code section 165 (without regard to certain limitations). When the Code section 165 casualty loss provision was changed following the Tax Cuts and Jobs Act of 2017 to require that the loss be incurred due to a federally declared disaster, it was unclear how hardship withdrawals may be impacted. The final regulations clarify that the Tax Act change does not apply to hardship distributions (i.e., a hardship distribution regarding damages to the principal residence is not tied to a federally declared disaster).
The IRS also added a new hardship withdrawal circumstance for expenses or losses (including loss of income) incurred on account of a federally declared disaster if the participant’s principal residence or principal place of employment is located in the area designated by the Federal Emergency Medical Agency for individual assistance at the time of the disaster.
Plan sponsors should review the above changes and determine which optional provisions they want to implement in 2019 and discuss with their recordkeeper operational changes available. Plan amendments will be needed to reflect these changes. Revenue Procedure 2020-9 extended the deadline, applicable to pre-approved plans, for adopting an interim amendment relating to the hardship distribution regulations to December 31, 2021.
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