Can Employer Contributions to 403(b) Custodial Accounts Be Distributed for Hardships?

Q: I heard the SECURE 2.0 Act of 2022 changed the hardship withdrawal rules for 403(b) plans to be more like 401(k) plans. Does this mean employer contributions to a 403(b) custodial account can now be distributed for hardship if the plan allows?

Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: Unfortunately, no. While Section 602 of the SECURE 2.0 Act did confirm that certain hardship distribution provisions of 403(b) plans would now mirror those under 401(k) plans, this section did not change the restriction on hardship distributions of employer contributions that have ever been invested in a 403(b) custodial account (e.g., an account invested in mutual funds). Those amounts still cannot be distributed for hardship.

The good news is that Section 602 did confirm that earnings on elective deferrals can now be withdrawn for hardship under a 403(b) plan if the plan permits, eliminating a historic source of confusion for plan participants. Section 602 also allows for the distribution of Qualified Nonelective Contributions and Qualified Matching Contributions and related earnings in the event of a hardship, though these money sources are less common than elective deferrals and thus will have less plan sponsor impact.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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