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Contact Sarah Lee at slee@cohencpa.com or a member of your service team to discuss this topic further. Beginning with the 2019 plan year, expenses and losses (including loss of income) incurred as a result of a disaster declared by the Federal Emergency Management Agency (FEMA) are included only if the participant’s principal residence or principal place of employment is located in the designated disaster area. The final regulations permit (but do not require) a 401(k) plan sponsor to expand the permitted sources by allowing hardship distributions from plan accounts holding elective deferrals including Qualified Non-Elective Employer Contributions (QNECs), Qualified Matching Contributions (QMACs), traditional safe harbor contributions, and all earnings regardless of when contributed or earned. The option to expand eligible amounts is effective beginning with the 2019 plan year. Mandatory for hardship distributions made on or after January 1, 2020, the “relevant facts and circumstances” test is eliminated in determining whether a distribution is necessary to satisfy a financial need. Please seek the advice of a tax attorney or tax advisor prior to making a tax-related insurance/investment decision. Plan sponsors may also choose to amend their plans to comply with permissible, but non-mandatory provisions of the final regulations as listed in some of the optional regulations below. The change is effective January 1, 2020 but can be applied as early as January 1, 2019. the applicable deadline is the employer plan sponsor’s tax filing deadline, plus extensions, for 2020. the IRS notes that while the remedial amendment deadline for restating a 403(b) plan to an IRS pre-approved 403(b) plan document is March 31, 2020, the Treasury Department and the IRS are considering providing for later amendment deadlines to be provided in separate guidance for 403(b) plan sponsors. Few people have taken advantage of relaxed rules offering early access to retirement savings for those facing financial hardship due to ... a 10% early withdrawal ... planning guide for 2020. IRS finalizes rules for hardship withdrawals, On September 19, 2019, the Internal Revenue Service (IRS) released its much-anticipated final regulations on hardship withdrawals from 401(k) and 403(b) plans. Before making the withdrawal, you will need to check if your specific 401(k) plan provides the option of 401(k) hardship withdrawals. For more information, talk to your Voya relationship manager. Other changes were made to the hardship withdrawal rules, as outlined below. The final rules are effective for hardship distributions made on or after Jan. 1, 2020 — rather than plan years beginning after Dec. 31, 2018, as stated in the proposed rules. Any tax discussion contained in this communication was written to support the promotion or marketing of the transactions or matter discussed herein. Employer contributions held in a 403(b)(7) custodial account are not available for a hardship withdrawal under a 403(b) plan. That six-month suspension has been eliminated, effective January 1, 2020. Eliminate the requirement that a participant take all available loans from the employer's plans before taking a hardship distribution. Qualified individuals affected by COVID-19 may be able to withdraw up to $100,000 from their eligible retirement plans, including IRAs, between January 1 and December 30, 2020. Not all plans permit you to take a hardship withdrawal. Plans that currently permit hardship distributions will need to make the amendments by December 31, 2021; however, operational changes will need to comply with the new regulations by January 1, 2020. Eliminating the loan requirement is optional beginning with the 2019 plan year, so some plans may continue to require participants to take a plan loan before qualifying for a hardship distribution. Any tax discussion contained in this communication was not intended or written to be used, and cannot be used by the recipient or any other person, for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person. Note: Plans have the option to either terminate a participant’s existing suspension when the suspension requirement for new hardship withdrawals is eliminated from the plan, or let the suspension run its course. BBA directs the Treasury Department to write new regulations eliminating the requirement that elective deferrals (either pretax or Roth) be suspended for six months after a hardship … The regulations are effective for distributions made on or after January 1, 2020 and reflect statutory changes and both a liberalization and simplification of existing IRS regulations. Information contained in this post is considered accurate as of the date of publishing. apply the elimination of the six-month suspension of employee contributions following a hardship withdrawal and/or make elective contributions, QNECs, QMACs, and/or safe harbor contributions described in 401(k)(13) (including any related earnings) eligible for hardship withdrawal as of the first day of the first plan year beginning after December 31, 2018. Loan activity was down 28%, compared with 2019. The IRS has issued final regulations that amend the rules relating to hardship distributions from 401(k) and other plans. Cohen & Company is not rendering legal, accounting or other professional advice. The employee first must obtain other available distributions under the plan and all other plans of deferred compensation maintained by the employer, whether qualified or nonqualified. Hardship withdrawals are still subject to income taxes. The safe harbor requirement to exhaust all nontaxable available plan loans is eliminated, effective for plan years beginning after December 31,2018. If the final hardship regulations are included in the 2019 RAL, the deadline for individually designed plans would be December 31, 2021. The guidance addresses changes to the hardship rules made by the Bipartisan Budget Act of 2018 (BBA 2018) and The Tax Cuts and Jobs Act of 2017 (TCJA 2017) and which were issued in proposed form in November 2018. A hardship distribution not-to-exceed the amount of the employee’s need (including amounts needed to pay taxes resulting from the distribution). The following article provides an overview of existing IRS loan and hardship requirements, updates to loans and hardship withdrawals under the CARES Act, and considerations for employers as they navigate what is likely to be a deluge of retirement plan withdrawal requests in the weeks and months ahead. The cross-reference to IRC Section 165 meant that (without further modification) hardship withdrawals due to casualty loss could only be attributable to a federally declared disaster during the 2018-2025 tax years. Note: These contribution sources may be available for hardship withdrawal under certain 403(b) plans, only if invested in an annuity contract, providing that the annuity contract permits such amounts to be withdrawn for hardship. Given this data, what lessons can we learn about participant behavior? Major changes to retirement plans due to COVID-19. The participant’s representation to the plan administrator that he or she has insufficient cash or other liquid assets to satisfy the need: Relates only to cash or liquid assets “reasonably available” to satisfy the need. Summary of the final hardship regulations. The employee must represent that he or she has insufficient cash or liquid assets “reasonably available” to satisfy the financial need. The Internal Revenue Service recently issued final regulations governing “safe harbor” hardship withdrawals from Section 401 (k) plans. Prohibit conditioning hardship distributions on or after January 1, 2020, on the suspension of elective and employee contributions. Lastly, it is possible that pending or future legislation or other regulatory updates may further expand or relax requirements relating to hardships or other in-service withdrawals. The new regulations make it easier for plan participants to access their savings for hardship reasons and also allows them to quickly start saving again following the hardship withdrawal. Previously, sponsors could suspend participants from making deferrals for 6 months after taking a hardship withdrawal. Expanded sources for hardship withdrawal The proposed rules permit hardship withdrawals from 401(k) plans consisting of elective contributions, QNECs, QMACs, and earnings on those amounts, regardless of when contributed or earned. Ability for a hardship withdrawal from a 401(k) plan to include earnings on elective deferrals, QMAC and QNEC sources (as well as their respective related earnings). Adding a new safe harbor reason that would allow a hardship distribution to cover losses and expenses incurred on account of a federally declared disaster designated as such by the Federal Emergency Management Agency (FEMA). Plan administrators can rely on this certification unless they have knowledge to the contrary. • Implementing new changes in federal law by allowing $5,000 withdrawals from your account for childbirth and adoptions, The changes include the elimination of required minimum distributions for 2020, the ability for certain taxpayers to borrow from a retirement plan on … Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law. Beginning with spring 2020, this new process called the “Former Quarter Drop” replaces the Hardship Withdrawal process. While you cannot take out loans from an IRA, you can through most 401(k) and 403(b) plans. As proposed, the final regulations: 1. The largest difference between early withdrawals and loans lies in the tax implications behind each. The new standard has introduced three objectives for 401(k) and 403(b) plans: The elimination of the relevant facts and circumstances test is optional for the 2019 plan year. The IRS’ final regulations make the following key changes: (1) requiring plans to eliminate the six-month suspension of contributions following a hardship distribution made on or after January 1, 2020; (2) permitting plans to eliminate the requirement that participants obtain all available plan loans prior to receiving a hardship distribution; (3) expanding the types of contribution sources available for hardship distributions; (4) adding a new type of safe harbor hardship expense for lo… Mandatory and effective for hardship distributions on or after January 1, 2020, the plan sponsor can no longer impose a six-month suspension of employee contributions after a hardship withdrawal from any qualified plan, 403(b) plan or governmental 457(b) plan. The new rules relax existing restrictions on taking hardship distributions from defined contribution plans. 403(b) hardship withdrawal plan amendment FAQs. Neither Voya Financial® or its affiliated companies or representatives offer legal or tax advice. contrary. The elimination of the six-month suspension of employee contributions following a hardship withdrawal applies to 401 qualified plans, 403(b) tax deferred annuity plans, and governmental 457(b) plans. The requirement to obtain this representation will apply to distributions made on or after January 1, 2020. Under the Budget, and applying to plan years beginning after December 31, 2018, a participant who takes a hardship withdrawal may continue to make, or begin making, elective deferral contributions to her 401(k) account and may exercise stock options following receipt of the hardship withdrawal, should her plan permit this change. 401(k) Loans in 2020. Previously, plans were prohibited from distributing investment earnings accrued after 1988 on elective contributions in a hardship withdrawal. This means for the 2020 plan year, these notices must be provided to participants at least 30 days (and not more than 90 days) before the beginning of the plan year. Mandatory for hardship distributions made on or after January 1, 2020, the “relevant facts and circumstances” test is eliminated in determining whether a distribution is necessary to satisfy a financial need. Also keep in mind the general rule for safe harbor notices is that they be provided to participants within a reasonable period before the beginning of the plan year. When taking a hardship withdrawal, the funds will be subject to … For these purposes, all other available distributions under all the employer’s plans includes any ESOP dividends; Includes a verbal representation by the participant obtained via telephone on a recorded line; Is assessed for veracity based on sufficiently accurate information that the plan administrator already possesses. 2. Replace the facts-and-ci… The final regulations are effective for hardship withdrawals made on or after January 1, 2020. For pre-approved plans other than 403(b) plans. Interpreting the data. The YMCA Retirement Fund’s hardship withdrawal rules will change as of January 1, 2020. The regulation also includes special rules for 403(b) plans, which limits amounts available for distribution. It allows students to convert course grades earned in previous quarters to an RD annotation and have the grade and points removed from their GPA. https://www.irs.gov/retirement-plans/hardship-distributions-from-401k-plans The final regulations provide guidance on the BBA 2018 changes to the hardship distribution rules: Providing that expenses relating to damage to a principal residence could be considered a casualty loss without regard to the new limitations in IRC Section 165, as enacted by TCJA 2017 (i.e., the damage to the principal residence does not need to arise as part of a federally declared disaster); and. Under prior law, for six months after you took a 401 (k) hardship withdrawal, you were not allowed to make contributions to your 401 (k) plan. On September 19, 2019, the Internal Revenue Service (IRS) released its much-anticipated final regulations on hardship withdrawals from 401(k) and 403(b) plans. • Allowing hardship withdrawals of up to $15,000 every 90 days for employees who are unemployed as a result of the coronavirus (COVID-19) epidemic. Sign up to receive articles and information on the topics that matter to you! For individually designed, non-governmental plans. Here are the most important changes: For hardship withdrawals occurring on or after January 1, 2020, plans are prohibited from suspending employee pay deferral contributions following a hardship withdrawal. In recognition of the unanticipated consequences of that cross-reference, the IRS modified the safe harbor reasons for a hardship withdrawal by: The final hardship regulations provide additional clarification from the proposed regulations: The final hardship regulations are effective for hardship withdrawals made on or after January 1, 2020. For COVID-related costs, the CARES Act has set a withdrawal limit of $100,000 in 2020. Under the previous regulation, this suspension was required for at least six months following the hardship withdrawal. The BBA changes detailed here could affect hardship distributions taken as early as January 1, 2019, depending on the specific provision and the options allowed within that provision. For example, if the six-month suspension is removed from the plan beginning on January 1, 2020, for a participant who took a hardship withdrawal in the second half of 2019, the plan may be amended to either terminate the suspension as of January 1, 2020 or let it run its course. Starting January 1, 2020, plans are no longer permitted to suspend participants from making salary deferrals into their retirement plan account after taking a hardship distribution. For hardship withdrawals prior to the beginning of 2020, a plan can (i) continue to impose the suspension under the current rules until January 1, 2020, (ii) decline to impose the suspension on withdrawals processed during the 2019 plan year but require anyone who took a hardship withdrawal in the last six months of the 2018 plan year to complete the original suspension … The Proposed Regulations explain that most of the changes are permitted to be implemented as early as January 1, 2019 (or January 1, 2018 as to the list of hardship events, as noted above), with the elimination of the six-month contribution suspension and corresponding employee representations effective January 1, 2020 being the only mandatory change. In addition, TCJA 2017 provided that for taxable years 2018 through 2025, the deduction for casualty loss is generally only available to the extent that the loss is attributable to a federally declared disaster as defined under Internal Revenue Code (IRC) Section 165(h)(5). Eliminating the suspension is optional for the 2019 plan year. (Certain optional rules apply for the two preceding years.) As directed by the Bipartisan Budget Act of 2018, the IRS updated the hardship withdrawal rules to redefine what may be classified as a financial hardship. Some of the changes to the rules for hardship withdrawals include: The required six-month suspension from making elective or employee contributions to any employer plan after taking a hardship withdrawal has been eliminated. apply the new safe harbor reasons for a hardship to hardship withdrawals made on or after January 1, 2018; and. And if you find yourself in a situation where you might need to consider an early withdrawal, think carefully about a loan as well. If you qualified for a coronavirus hardship withdrawal from a 401(k) plan offering that option, the distribution should not have been subject to withholding. The final regulations adopt the proposed regulations with few changes. A hardship withdrawal for disaster-related expenses: Is available only to the employee who lived or worked in the disaster area. The final hardship regulations confirm that the safe harbor requires the elimination of the suspension of a participant’s elective deferrals and employee after-tax contributions to 401, 403(b) and governmental 457(b) plans of the employer for a period of six months following that participant’s hardship withdrawal under a 401(k) or 403(b) plan, effective for hardship distributions taken on or after January 1, 2020. The guidance addresses changes to the hardship rules made by the Bipartisan Budget Act of 2018 (BBA 2018) and The Tax Cuts and Jobs Act of 2017 (TCJA 2017) and which were issued in proposed form in November 2018. These regulations reflect the changes made by both the Tax Cuts and Jobs Act of 2017 and the Bipartisan Budget Act of 2018. The new rules will affect the requirements for taking out a loan before applying for a hardship withdrawal, the ability of participants who have taken a hardship withdrawal to contribute to the Fund’s 403(b) Smart Account, and the requirements to provide supporting documentation to … Some of the plan changes are mandatory and must be made by Jan. 1, 2020, while others ar... IRS Final Rule Eases 401(k) Hardship Withdrawals, Requires Amending Plans An employer may decide, as a matter of plan design, to impose a suspension of employee contributions to other plan types (including a 457(b) plan sponsored by a nonprofit organization and a nonqualified plan under IRC Section 409A). On September 23, 2019, the U.S. Treasury Department and the IRS published final regulations amending the rules governing hardship distributions for both 401(k) and 403(b) retirement savings plans. According to the IRS, the agency will no longer need to issue special disaster relief announcements to permit hardship withdrawals to those affected by federally declared disasters. Eliminating the suspension could encourage more hardship distributions, but it also will encourage those plan participants who take distributions to start rebuilding their savings sooner. One of the biggest changes now being made is that earnings on elective contributions can be distributed in a 401(k) plan hardship withdrawal. 401k and 403b Hardship Rules Changes in 2020 On September 23, 2019, the IRS published final regulations for hardship distributions for both 401 (k) and 403 (b) plans. 3. Now that the final regulations have been issued, it is the responsibility of plan sponsors to review their plan’s hardship withdrawal procedures and determine what provisions will be adopted to comply with the new regulations. Effective for plan years beginning after December 31, 2018, a 401(k) plan may – but is not required to – permit a hardship withdrawal to include earnings on elective deferrals. An employer may choose to add this disaster-relief safe harbor to the plan at a later date (for example, when such a disaster occurs), provided that the amendment to permit the disaster-relief safe harbor is adopted by the end of the plan year in which it is effective. The final regulations are effective for hardship withdrawals made on or after January 1, 2020. Plan sponsors can eliminate the requirement that a plan participant must use available plan loans prior to receiving a hardship distribution. It is also the plan sponsor’s responsibility to update any participant communications, including the summary plan description and safe harbor notice, if applicable, to ensure they reflect the upcoming changes. The Cares Act says 401(k) savers can take a penalty-free withdrawal if it is paid back in three years. Expenses or losses of an employee’s relative or dependent will not be considered eligible under this safe harbor event; Is not subject to a specified deadline for a hardship distribution request related to the disaster-relief safe harbor; and. Plan sponsors will need to amend the hardship provisions of their plan document. The guidance addresses changes to the hardship rules made by the, Summary of the legislative changes to hardship withdrawal rules. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. However, employers can choose to apply the final rules for distributions made in 2019. Elimination of the six-month suspension of elective deferrals and employee contributions following a hardship withdrawal and the requirement that all available plan loans be taken prior to a hardship distribution; and. Since your savings went into your retirement plan on a pretax basis, you’ll be paying income taxes on … 1. The final regulations reflect statutory changes, including changes made by the Bipartisan Budget Act of 2018.The Act called for the Secretary of Treasury to amend regulations to delete the six-month prohibition on contributions to a retirement plan following a hardship … The original thinking was that if an employee truly needs to take a hardship withdrawal, then they should al… The final regulations add to the list of distributions deemed to be an immediate and heavy financial need. 6 Major Changes to Hardship Distribution Rules for 401(k) and 403(b) Retirement Plans. The final regulations are summarized below: Both 401(k) and 403(b) retirement savings plans will need to be amended to reflect the final regulations. The new standard has introduced three objectives for 401 (k) and 403 (b) plans: Effective for plan years beginning after December 31, 2018, a 401(k) plan may – but is not required to – permit a hardship withdrawal to include employer contributions that are QNECs and QMACs (including those made under a safe harbor 401(k) plan) and earnings attributable to these contributions. Meanwhile, hardship withdrawals and loan activity decreased year-to-date through September when compared with the same period in 2019. the applicable deadline will be the end of the second calendar year that begins after the issuance of the annual IRS Required Amendments List (RAL) that contains the hardship rule changes.

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