Have you been here: a serious financial hardship has struck your family and you’re in desperate need of funds? Whether it’s a medical expense, avoiding eviction, a burial/funeral expense, or another extremely difficult situation, we have a little bit of good news. Getting a hardship distribution from your 401(k) to help in these times just got easier, thanks to SECURE 2.0.
Background: Allowing for Hardships
Many plans allow a plan participant to take a distribution of their salary deferrals (401(k) or 403(b) contributions), as well as safe harbor contributions, to satisfy a personal financial hardship. A hardship distribution can be permitted for an immediate and heavy financial need. The total allowed is the amount necessary to satisfy that need. However, the participant must not have other means to satisfy it (including all other distribution options under the plan). Most retirement plans are designed to limit hardship distributions to the IRS regulation’s prescribed safe harbor reasons, rather than adopting a facts and circumstances approach.
Until recent legislation, the plan participant was required to provide documentation to support their request for a hardship distribution. They needed to show they had an immediate and heavy financial need. They also needed to show they were not requesting more than what was needed. Plan administrators then had to review this documentation to determine if a hardship withdrawal was substantiated. In some cases, this review was done by the plan’s service provider on behalf of the plan.
Before SECURE 2.0, the IRS took the position that participants could self-certify their need for a hardship withdrawal. However, the plan administrator still had responsibility to provide sufficient documentation to demonstrate compliance if the eligibility for the distribution was called into question.
NOW: New SECURE 2.0 Changes
Effective immediately, SECURE 2.0 has added a new option for plan administrators to allow participants to self-certify their hardship distribution. The participant must only certify that they have a need and that the request for distribution is not more than what is needed to satisfy the need. By doing so, the plan administrator can approve the request without further review. This assumes the plan administrator does not have knowledge to the contrary.
Note: SECURE 2.0 did not change the requirements to take a hardship distribution. The same rules for determining what expenses are indeed a hardship worthy expense will continue to apply. Also, we anticipate that the IRS will issue further guidance to clarify this new option.
Interested in more information on SECURE 2.0 changes? Fill out the form below and we’ll send you our overview!