Must Plan Sponsors Allow All Reasons for Hardships?

“Some of the expenses for which distributions are deemed to be made on account of an immediate and heavy financial need under new hardship withdrawal rules appear to be difficult to administer in practice, particularly the new expense related to federally declared disasters.Must a 403(b) plan sponsor adopt the entire list of expenses for permissible hardship, or can sponsors pick and choose from the list?”

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:

Good question! The IRS helpfully addressed this question in the preamble to the final hardship regulations released in September. (84 Fed. Reg. 49651) Specifically, the preamble provides:

“Two commenters asked whether a plan must include every one of the seven expenses in the §1.401(k)-1(d)(3)(ii)(B) list of deemed immediate and heavy financial needs and cover every individual described in the list (for example, a primary beneficiary under the plan, in the case of certain expenses) in order to be considered as using the safe harbor standards for hardship distributions. Under the IRS’s pre-approved plan program for qualified plans, certain section 401(k) plans that provide for hardship distributions will not be approved unless the distributions are made under circumstances described in the safe harbor standards in the regulations under section 401(k). For this purpose, a plan making hardship distributions for some but not all the safe harbor expenses, or for expenses of some but not all the categories of individuals described in §1.401(k)-1(d)(3)(ii)(B), is considered to be using the safe harbor standards for hardship distributions.”

Although there are certain special rules under the regulations for 403(b) plans, the “safe harbor” expenses apply to 403(b) plans in the same manner as to 401(k) plans. Therefore, a 403(b) plan may permit hardship distributions on account of some, but not all, of the expenses which are deemed to be on account of an immediate and heavy financial need and still be considered within the safe harbor standards.

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.