Congress has made welcome changes to the hardship distribution rules for defined contribution plans as a result of the Bipartisan Budget Act of 2018 (BBA).  Plans must be amended for these changes no later than December 31, 2021.

Removal of the 6-month deferral suspension requirement

For hardship distributions taken in the second half of 2018 and during 2019, Plan Sponsors may choose whether or not to apply a 6-month deferral suspension period.  For hardship distributions taken during 2020 forward, a 6-month deferral suspension is prohibited.

Determining eligibility for a hardship distribution

The general standards that determines whether a hardship distribution is necessary to satisfy a financial need are:

  • A hardship distribution cannot exceed the amount of a participant’s need
  • The participant must first obtain all other available distributions (other than loans*) under all the employer’s plans (such as an in-service distribution or allowable rollover distribution)
  • The participant must represent that he/she has insufficient cash or other liquid assets to satisfy the financial need
    • The Plan Sponsor may rely on the participant’s representation of his/her financial need unless the Plan Sponsor has actual knowledge to the contrary
    • Although this standard can be applied earlier, it is required for hardship distributions made on or after January 1, 2020

Additional money sources available for hardship distributions

Safe Harbor contributions, qualified non-elective contributions, qualified matching contributions and all earnings on elective deferrals, regardless of when they were contributed, are now available for hardship distributions.  Plans are not required to allow hardship distributions from these sources.

Note that earnings on elective deferrals are not available for hardship distributions from a 403(b) Plan, and qualified non-elective contributions and qualified matching contributions are not available for hardship distributions from a 403(b)(7) custodial account.

*Taking a plan loan is not required before taking a hardship distribution

A participant is no longer required to take a plan loan before taking a hardship distribution; however, the Plan Sponsor may continue to enforce this requirement.

Expanded hardship reason

A hardship distribution can be taken for expenses and losses incurred by the Participant on account of a disaster declared by the Federal Emergency Management Agency (FEMA), provided that the Participant’s principal residence or principal place of employment at the time of the disaster was located in an area designated by FEMA for individual assistance with respect to the disaster.


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