Compliance November 2, 2021

IRS Issue Snapshot Reflects Changes to Hardship Withdrawal Rules

Though the document addresses changes for 401(k) plans, all but one of them applies to 403(b) plans as well.

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The rules for participant hardship withdrawals from 401(k) and 403(b) plans have changed since the passage of the Bipartisan Budget Act of 2018 and subsequent IRS regulations, and the agency has updated its “Issue Snapshot – Hardship Distributions from 401(k) Plans” to reflect those changes.

The bill called for the secretary of the Treasury to amend regulations to delete the six-month prohibition on contributions to a retirement plan following a hardship withdrawal. The bill also extended the allowance of hardship withdrawals to include contributions to a profit-sharing or stock bonus plan, qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs); earnings on the contributions are now allowed.

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In addition, the bill says, “A distribution shall not be 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.” These rules say they amend Section 401(k) of the Internal Revenue Code (IRC) and subsections under that. They are effective for plan years beginning after December 31, 2018.

However, the IRS regulations following passage of the bill clarified that “income attributable to Section 403(b) elective deferrals continues to be ineligible for distribution on account of hardship.”

The elimination of the requirement to take a loan before requesting a hardship is optional for plan sponsors; they can still require participants to take any available loans under the plan first. In addition, 401(k) plan sponsors may limit the type of contributions available for hardship distributions and whether earnings on those contributions are included.

However, the removal of the six-month suspension of elective deferrals is mandatory for hardship distributions made on or after January 1, 2020; plan sponsors cannot elect to retain this provision after that date.

The IRS Issue Snapshot includes changes to the safe harbor list of expenses for which distributions are deemed to be made on account of an immediate and heavy financial need. The safe harbor list is modified by:

  • adding “primary beneficiary under the plan” as an individual for whom qualifying medical, educational and funeral expenses may be incurred;
  • adding that damage to a principal residence that would qualify for a casualty deduction under IRC Section 165 does not have to be in a federally declared disaster area; and
  • adding a new type of expense to the list, relating to expenses incurred as a result of certain disasters.

In addition, the IRS regulations eliminated the rules 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 provided one general standard for determining whether a distribution is necessary.

“Issue Snapshot – Hardship Distributions from 401(k) Plans” is available here.

Compliance November 2, 2021

DOL Alleges ESOP Sale Illegally Benefited Plan Fiduciaries and Their Children

The Department of Labor says the plan’s ownership interest was sold for less than market value, effectively transferring the rest of the stock’s value to board members and their children’s trusts.

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The Department of Labor (DOL) has filed a complaint in the U.S. District Court for the Eastern District of Texas alleging that three members of RVNB Holdings Inc.’s board of directors and a trustee of the company’s employee stock ownership plan (ESOP) allowed the ESOP’s ownership interest to be sold for less than its market value in violation of the Employee Retirement Income Security Act (ERISA).

In its complaint, the department says that, at the time of the stock sale, the ESOP-owned stock was worth between $44.8 million and $58.2 million. The DOL alleges that rather than ensure that the ESOP received full value for its 100% ownership of the moving and storage company, the plan fiduciaries caused RVNB to redeem the ESOP’s entire ownership interest for just $12.5 million, effectively transferring the rest of the stock’s value to board members and their children’s trusts at the expense of the employee participants of the RVNB plan. The company was subsequently sold, along with other assets, to a third party for $252 million.

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The 2012 irrevocable trusts of two of the board members’ children are also named as defendants in the suit. The department alleges that the two trusts were also knowing participants in the ERISA violations and received millions of dollars that should have gone to the ESOP.

The complaint seeks to recover $35 million in losses and enjoin the defendants from acting as trustees, fiduciaries or service providers in any ESOP transaction.

“Instead of acting with undivided loyalty to the plan and the participant employees, as was their legal duty, the RVNB fiduciaries transferred most of the retirement plan’s value from the plan and its employee owners to company insiders and relatives at the employees’ expense,” said Acting Assistant Secretary of Labor for the Employee Benefits Security Administration Ali Khawar in a press release.

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