(b)lines Ask the Experts – New Hardship Rules Regarding Earnings on 403(b) Elective Deferrals

“Back then you stated that the issue would likely be resolved when the IRS issued new regulations regarding hardship distributions. Do the Experts have any update?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

Yes, the Experts remember that question quite well, and with the release of the IRS’ proposed  amendments to the hardship regulations on November 9, the issue has now been clarified, as follows (boldface text reflects the Experts emphasis):

“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 §1.401(k)-1(d)(3); thus, the proposed new rules relating to a hardship distribution of elective contributions from a section 401(k) plan generally apply to section 403(b) plans. However, Code section 403(b)(11) was not amended by section 41114 of BBA 2018; therefore, income attributable to section 403(b) elective deferrals continues to be ineligible for distribution on account of hardship.”

Thus, if the proposed regulations are adopted as drafted, though earnings on 401(k) elective deferrals may now be withdrawn for reasons of financial hardship, effective 1/1/2019, earnings on 403(b) deferrals may NOT be withdrawn for financial hardship. Going forward, this will be yet another difference between 401(k) and 403(b) plans.

Text of the proposed amendments to the hardship regulations is here.

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.