The IRS has issued final regulations on Hardship Distributions! Here’s an overview of those changes and how they can affect your company 401(k).

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Retirement plans are an essential part of safeguarding our future, however, unforeseen circumstances can sometimes force us to take distributions out of our retirement plan earlier than we planned. These distributions, known as “hardship distributions”, were designed to give plan participants access to their retirement savings in case of a financial emergency, such as medical expenses, home repairs or natural disaster.

In 2018, the Bipartisan Budget Act was introduced, which included several provisions that modified the rules governing hardship distributions. These changes were put in place with the intention of making it easier for plan participants to access their funds during financial difficulties.

One significant modification made to hardship distribution rules is the elimination of the requirement to first take out loans from a participant’s account before considering a hardship withdrawal. Previously, participants had to take out a plan loan before being eligible for hardship distribution. This requirement was often a barrier for plan participants, especially those who had already reached their plan’s loan limit or did not want to take on more debt.

Another change made to hardship distribution rules is the expansion of the sources of funds available for distribution. Previously, participants were only allowed to withdraw their own contributions, but as per the new rules, they can now withdraw their own contributions along with earnings and employer contributions, making it easier for them to get the funds they need.

Additionally, the 10 percent early withdrawal penalty was removed for hardship distributions. This means that participants who are younger than 59½ are no longer subject to a 10 percent penalty for taking a hardship distribution from their retirement plan. However, the money withdrawn is subject to income tax, which can help offset any potential loss of retirement savings.

One crucial aspect of the updated hardship distribution rules is the need for prompt reporting and documentation. Plan sponsors are required to implement procedures to ensure that hardship disbursements are appropriately documented and that the distributions are taken only for the purpose of alleviating a financial hardship.

The changes to hardship distribution rules give participants greater flexibility and access to their retirement savings during difficult times. However, taking a hardship distribution should be considered a last resort, as it can impact their long-term retirement savings. Plan participants should also consult their plan administrator, financial advisor or tax professional before making any withdrawals from their retirement funds.

In conclusion, the updates made to the hardship distribution rules offer participants more flexibility and ease when it comes to withdrawing funds from their retirement plans during financial difficulties. However, it is necessary to remember that taking out funds should only be done after considering all the other options and for a severe financial hardship. It is always advisable to consult with a financial advisor or tax professional before taking any steps involving hardship distributions from our retirement plan.