Summary of Laws and Regulations on Hardship …...xxxx 1 Bipartisan Budget Act: IRS Releases Final Regulations December 2, 2019 Summary of Laws and Regulations on Hardship Withdrawals

xxxx

1

Bipartisan Budget Act: IRS Releases Final Regulations

December 2, 2019

Summary of Laws and Regulations on Hardship Withdrawals

Overview: The Treasury and IRS recently issued final regulations on changes to the hardship withdrawal requirements based on changes made by the Bipartisan Budget Act of 2018 (“BBA”).

The final regulations are very similar to the proposed regulations and provide clarification on several issues that are identified in the “Treasury and IRS Final Regulations” column. They are

generally effective for hardship withdrawals made on or after January 1, 2020, but a plan sponsor may apply the changes on or after January 1, 2018. Some of the commentary in the “Treasury

and IRS Final Regulations” column in the table below is based on information in the preamble to the regulations.

Hardship Withdrawal Requirements Before the Tax Law Changes

Hardship Withdrawal Requirements Because of the Tax Law Changes

Treasury and IRS Proposed Regulations (Issued in November of 2018)

Treasury and IRS Final Regulations (Issued in September of 2019)

Employees in 401(k) and 403(b) plans could request hardship withdrawals for the repair of their principal residence due to a personal casualty loss. The definition of casualty loss for income tax purposes was based on Section 165 of the Internal Revenue Code before January 1, 2018. That definition was also used for purposes of the safe harbor reasons for employees who requested money for the repair of their principal residence due to a personal casualty loss. Employees could request a hardship withdrawal regardless of whether their principal residence was located in a federally declared disaster area for fires, floods, sewer back-ups, etc.

The Jobs and Tax Cuts Act of 2017 changed the definition of a personal casualty loss deduction for income tax purposes under Section 165 of the Internal Revenue Code for calendar year taxpayers for the period January 1, 2018, through December 31, 2025. That change affects employees in 401(k) and 403(b) plans since that definition is also used to determine hardship withdrawals under the safe harbor reasons test. Now an employee’s principal residence must be located in a federally declared disaster area to request a hardship withdrawal for expenses related to a personal casualty loss. This change will also impact 403(b) plans using the IRS 401(k) plan safe harbor test.

Hardship Withdrawal for the Repair of a Principal Residence Due to a Casualty Loss – The IRS reinstated the original requirement that employees in 401(k) and 403(b) plans could request hardship withdrawals for the repair of their principal residence due to a personal casualty loss regardless of whether the residence is located in a federally declared disaster area designated by Federal Emergency Management Agency (FEMA). In addition, the loss does not need to exceed 10% of the employee’s adjusted gross income in order to be considered an immediate and heavy financial need. This change may apply to hardship withdrawals made on account of an immediate and heavy financial need on or after January 1, 2018.

Hardship Withdrawal for the Repair of a Principal Residence Due to a Casualty Loss – The final regulations follow the approach of the proposed regulations.

Employees in 401(k) or 403(b) plans may qualify to obtain hardship withdrawals under the safe harbor reasons if the costs or expenses are deemed to satisfy an immediate and heavy financial need for any of the

The Bipartisan Budget Act of 2018 (“Budget Act”) did not change the six-safe harbor reasons for an employee to obtain a hardship withdrawal. However, it did make several changes to the hardship withdrawal rules that appear to be optional provisions,

The proposed regulations were issued in response to the directives in the Budget Act that were identified in the “Hardship Withdrawal Requirements Because of the Tax Law Changes” column. The Budget Act and the proposed regulations apply to 401(k) and 403(b) plans but

xxxx

2


December 2, 2019





following reasons: 1. medical care, 2. the purchase of a principal residence, 3. post-secondary education, 4. prevent eviction or foreclosure of a principal residence, 5. burial and funeral expenses, or 6. repairs to a principal residence due to a personal casualty loss that would otherwise be tax-deductible under Section 165 of the Internal Revenue Code. Employees must exhaust all other available plan options for withdrawal, including a plan loan. Elective deferral contributions under the safe harbor test must be suspended for six months after the date of their hardship withdrawal. Qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), and earnings on elective deferral contributions are not available for hardship withdrawals.

which will become effective on the first day of the plan year that begins in 2019:

1. directs the Treasury to update its 401(k) safe harbor regulations to remove the required six-month suspension of elective employee contributions after receipt of a hardship withdrawal,

2. extends Section 401(k) of the Internal Revenue Code to allow hardship withdrawals of qualified nonelective contributions (“QNECs”), qualified matching contributions (“QMACs”), and earnings on employee elective contributions (earnings on 403(b) plan employee election contributions may not be distributed), and

3. amends Section 401(k) of the Internal Revenue Code Section to allow hardship withdrawals without first requiring employees to obtain available plan loans.

not to Puerto Rico-only qualified plans. New Eligible Hardship Withdrawal Expenses – In general, the IRS made several changes for hardship withdrawals from 401(k) and/or 403(b) plans that are “deemed” to be made on account of an immediate and heavy financial need on or after January 1, 2018, by:

(A) identifying that a “primary beneficiary under the plan is an individual who is named as a beneficiary under the plan and has an unconditional right, upon the death of the employee, to all or as portion of the employee’s account under the plan” for whom qualifying medical, educational, and funeral expense may have been incurred (the purpose of this change was to incorporate prior IRS guidance into the proposed regulations),

(B) clarifying that expenses for the repair of an employee’s principal residence due to a personal casualty loss regardless of whether the residence is located in a federally declared disaster area are acceptable and the loss does not need to exceed 10% of the employee’s adjusted gross income in order to be considered an immediate and heavy financial need.

(C) adding a new category for expenses and

losses (including loss of income) incurred by an employee because of a natural

New Eligible Hardship Withdrawal Expenses -

(A) The final regulations follow the approach of the proposed regulations.

(B) The final regulations follow the approach of the proposed regulations.

(C) Background Information: The IRS issued Announcements for Hurricanes Harvey, Irma, Maria and the 2017 California

xxxx

3


December 2, 2019





disaster declared by FEMA, provided that the employee’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. The IRS specified that employees who were impacted by Hurricanes Florence and Michael can obtain natural disaster hardship withdrawals if they are distributed by March 15, 2019. The allowable expenses are similar to those identified in IRS Announcement 2017-15 that was issued for hardship withdrawals for employees affected by Hurricane Maria and the California Wildfires (as of the incident date, October 8, 2017).

Wildfires that identified the relaxation of a plan’s procedural rules for hardship withdrawal for affected participants. (The IRS did not issue Announcements for Hurricane Florence and Michael but included information in their proposed regulations). The Announcements allowed participants who were affected by the hurricane or wildfire to assist a son, daughter, parent, grandparent or other dependent that lived or worked in the disaster area on specified date are impacted if they requested a hardship withdrawal by a specified deadline.

The final regulations identified that:

the IRS will no longer issue Announcements for future disasters,

participants can only obtain disaster-related hardship withdrawals for themselves and not for certain relatives,

there will not be a relaxation of the procedural rules for disaster-related hardship withdrawals,

there will not be an specific deadline for a participant to request a disaster-related hardship withdrawal, and

a plan that does not have a disaster-related hardship withdrawal provision and wants to add one must timely amend its plan document since it is a discretionary amendment. The amendment must be adopted by the last day of the plan year in which the

xxxx

4


December 2, 2019





(D) The employee must have obtained all other available distributions under the employer’s plans. The employee must represent that he/she has insufficient cash or other liquid assets to satisfy the financial need and that his/her need cannot reasonably be relieved from other available resources. A plan administrator may rely on the employee’s representation unless they have actual knowledge to the contrary.

401(k) Plans – The proposed regulations:

do not permit the suspension of elective employee contributions following receipt of a hardship withdrawal on or after January 1, 2020. A plan sponsor may stop

amendment is first effective.

(D) The final regulations clarify that the employee can make a written or a verbal representation on a recorded line that he/she has insufficient cash or liquid assets to satisfy the financial need and that his/her need cannot be reasonably relieved from other available resources. In addition, the preamble clarifies that the use of the term “reasonably available” in the final regulations means that a participant does not have to exhaust cash or a liquid asset that is earmarked for a specific purpose. “Thus, an employee could make a representation that he or she has insufficient cash or other liquid assets reasonably available to satisfy a financial need even if the employee did have cash or other liquid assets on hand, provided those assets were earmarked for payment of an obligation in the near future (for example, rent).” There is no need to inquire into an employee’s financial condition unless the employer had actual knowledge to the contrary.

401(k) Plans – The final regulations: The final regulations did not change this

provision but provided clarification on the plans to which the suspension prohibition applies: 401(k) plans, 403(b) plans, and

xxxx

5


December 2, 2019





or continue the suspensions of elective contributions for hardship withdrawals taken prior to January 1, 2020,

allow a plan sponsor to determine

whether or not to require a participant to

first obtain a plan loan from all employer

plans before requesting a hardship

withdrawal,


whether to include or exclude earnings as

part of a hardship withdrawal.

A plan sponsor may, but is not required

to, suspend elective employee contributions for six months following receipt of a Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART) qualified reservist distribution because of a leave of absence for qualified military duty,

allow hardship withdrawals of QNECs, QMACs, safe harbor plan contributions (safe harbor nonelective, safe harbor matching contributions, qualified automatic contribution arrangement), and earnings on employee elective contributions. A plan may limit hardship withdrawals of QNECs, QMACs, safe

governmental 457(b) plans. Governmental 457(b) plans cannot impose a suspension of elective deferrals after a hardship distribution from the employer’s related 401(k) and/or 403(b) plan.

The final regulations follow the approach of

the proposed regulations.

The final regulations follow the approach of the proposed regulations.

The final regulations do not alter the HEART requirement that a six-month suspension must be imposed after a participant obtains a qualified reservist distribution.

The final regulations did not change this provision but confirmed that safe harbor plan nonelective and/or matching contributions may be withdrawn as a hardship withdrawal.

xxxx

6


December 2, 2019





harbor plan contribution, and earnings on employee elective contributions.

403(b) Plans – The proposed regulations:

do not permit the suspension of elective employee contributions following receipt of a hardship withdrawal on or after January 1, 2020. A plan sponsor may stop or continue the suspensions of elective contributions for hardship withdrawals taken prior to January 1, 2020,


whether or not to require a participant to

first obtain a plan loan from all employer

plans before requesting a hardship

withdrawal,

a plan sponsor may, but is not required to, suspend elective employee contributions for six months following receipt of a Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART) qualified reservist distribution because of a leave of absence for qualified military duty,

allow QNECs and QMACs in 403(b)

403(b) Plans – The final regulations:

The final regulations did not change this provision but provided clarification on the plans to which the suspension prohibition applies: 401(k) plans, 403(b) plans, and governmental 457(b) plans. Governmental 457(b) plans cannot impose a suspension of elective deferrals after a hardship distribution from the employer’s related 401(k) and/or 403(b) plan.



The final regulations follow the approach of

xxxx

7


December 2, 2019





annuities to be distributed as hardship withdrawals but not QNECs and QMACs in 403(b) custodial accounts,

make it clear that an employee in a 403(b) plan cannot request a hardship withdrawal of earnings on elective deferral contributions. (The Budget Act did not amend Internal Revenue Code Section 403(b)(11) to allow hardship withdrawals of earnings on employee elective contributions for 403(b) plans.)

401(k) Plan Document Amendment Deadline – There are two types of plan document amendments, discretionary and disqualifying provisions. A discretionary amendment must be adopted by the last day of the plan year in which the amendment is first effective. The deadline for amending a plan document for a qualification requirement, sometimes referred to as a “disqualifying provision,” is the last day of the second calendar year that begins after the IRS issues their Required Amendments List. This is a list issued by the IRS for use by attorneys and practitioners who draft plan documents. The list identifies changes in any of the qualification requirements that may require a plan document amendment in order to remain qualified. The IRS normally issues the list annually during the fourth quarter of a calendar year. A plan amendment that is not a “disqualifying provision” but is integrally related to a plan provision that is

the proposed regulations.


401(k) Plan Document Amendment Deadline -Please refer to the narrative in the “Treasury and IRS Proposed Regulations” column for information about discretionary and disqualifying provisions. The final regulations follow the approach of the proposed regulations. A plan sponsor should contact their legal counsel for assistance to determine the amendment deadline for their plan document based on the final regulations. The final regulations confirmed that plan document amendments related to the final hardship withdrawal regulations for 401(k) plans are all integrally related and will be treated as disqualifying provisions. However, plan document amendments that are discretionary (changes to the plan’s terms that are not disqualifying or “integrally-related” provisions, retaining the expanded definition from the proposed

regulations) must be adopted by the last day of

xxxx

8


December 2, 2019





a “disqualifying provision” may be amended by the same deadline as the one required for a “disqualifying provision.” The proposed regulations state that “ A plan amendment that is related to the final regulations, but does not correct a disqualifying provision, including a plan amendment reflecting (1) the change to section 165 (relating to casualty losses) or (2) the addition of the new safe harbor expense (relating to expenses incurred as a result of certain federally declared disasters), will be treated as integrally related to a disqualifying provision. Therefore, all amendments that relate to the final regulations will have the same amendment deadline. This deadline will also apply to an amendment reflecting the extension of the relief under Announcement 2017-15 to victims of Hurricanes Florence and Michael, as provided in this preamble.” Thus, if the IRS were to release their Required Amendments List in 2019 that includes the relevant amendments for these hardship withdrawal regulations, then a plan document must be amended by December 31, 2021, for those changes. However, there appears to be some difference in opinion about whether some of the provisions that may be elected by plan sponsors are really “discretionary amendments,” which have a different amendment date. We anticipate that the Treasury and IRS will clarify this issue when they issue final regulations. The Fidelity Volume Submitter 401(k) Plan document

the plan year in which they are first effective. The final regulations clarified that there are different deadlines to amend a 401(k) plan document based on whether it is an individually designed or a preapproved plan document, like Fidelity’s Volume Submitter document. Individually Designed Plan Documents – The final regulations confirmed that plan document amendments related to the final hardship withdrawal regulations for 401(k) plans are all integrally related and will be treated as disqualifying provisions and must be executed by the last day of the second calendar year that begins after the IRS issues their Required Amendments List. Thus, if the IRS were to release their Required Amendments List in 2019 that includes the relevant amendments for these hardship withdrawal regulations, then a plan document must be amended by December 31, 2021. Fidelity Volume Submitter (Preapproved) Plan Document – The final regulations generally apply to participant hardship withdrawals made on or after January 1, 2020. However, the final regulations were unclear about the interim plan document amendment deadline for plan sponsors using a preapproved plan document who implemented the regulatory changes for hardship withdrawals before 2020. Fidelity is working with a recordkeeping industry group (The SPARK Institute) to confirm the deadline.

xxxx

9


December 2, 2019





will be amended well before the required date. 403(b) Plan Document Amendment Deadline Please note that 403(b) plans do not follow the same plan document amendment deadlines as 401(k) plans, and the current remedial amendment period ends March 31, 2020.

The amendment to the Fidelity Volume Submitter 401(k) Plan document addressing Fidelity’s administrative best practices is currently being drafted. A communication will be sent later this year with the amendment and the procedures for those plan sponsors that did not adopt Fidelity’s administrative best practices. 403(b) Plan Document Amendment Deadline The March 31, 2020 amendment deadline for 403(b) plans to update their document for prior laws and regulations were announced several years ago. The IRS released Revenue Procedure 2019-39 on September 30, 2019, identifying the applicable dates to amend 403(b) plans. Different deadlines apply to governmental and non-governmental plans, so plan sponsors should contact their legal counsel for assistance. Individually Designed Non-Governmental Plan Document- Amendments must be executed by the last day of the second calendar year that begins after the IRS issues their Required Amendments List. Thus, if the IRS were to release their Required Amendments List in 2019 that includes the relevant amendments for these hardship withdrawal regulations, then individually designed non-governmental plan documents must be amended by December 31, 2021. The amendment deadline for individually designed governmental plans is later and relates to the timing of the relevant legislative session.

xxxx

10


December 2, 2019





Fidelity Preapproved Plan Document The amendment to the Fidelity Volume Submitter 403(b) Plan document reflecting the final hardship regulations is currently being drafted. Fidelity will provide a draft Good Faith Amendment to you which you can use to amend your 403(b) plan document. Fidelity will communicate the required steps that you must follow to sign the plan amendment in a timely manner.

N/A

N/A

New Hardship Withdrawal General Standard – There will be one new general standard in effect for hardship withdrawals on or after January 1, 2020, for determining whether an employee’s hardship withdrawal is necessary to satisfy the financial need.

The hardship withdrawal may not exceed the employee’s need, including taxes and penalties reasonably anticipated to result from the distribution.

No Alternative Means Is Reasonably Available – The employee must have obtained all other available distributions under the employer’s plans. The employee must represent that he/she has insufficient cash or other liquid assets to satisfy the financial need. A plan administrator may rely on the employee’s

New Hardship Withdrawal General Standard -


The final regulations also clarify that an

employee’s representation about

whether he or she has insufficient cash or

liquid assets reasonably available to

satisfy the financial need will not suffice if

the plan administrator has actual

knowledge to the contrary. The plan

xxxx

11


December 2, 2019





representation unless they have actual knowledge to the contrary.

Additional Conditions – A plan may generally impose additional conditions for hardship withdrawals, such as requiring an employee to obtain all nontaxable plan loans. In addition, a plan may impose a requirement to suspend employee elective contribution after receipt of a hardship withdrawal but only until January 1, 2020.

Note: The Commissioner may expand the list of immediate and heavy financial needs that qualify for hardship withdrawals.

administrator does not have an obligation

to inquire about the participant’s

situation and it “… is limited to situations

in which the plan administrator already

possesses sufficiently accurate

information to determine the veracity of

an employee representation.” Thus, a

plan administrator may rely on the

employee’s representation unless they

have actual knowledge to the contrary.

The final regulations follow the approach

of the proposed regulations.

Note: There was no change to the unforeseeable emergency distribution rules under Code section 457(d)(1)(A)(iii) or the associated regulations. Therefore, elective deferrals may continue to be suspended after an unforeseeable emergency distribution from an eligible 457(b) plan.

Additional Considerations Included in the Final Regulations – There were several new items included in the final regulations:

Safe Harbor Contribution Plan Notices – A description of the new hardship withdrawal provisions must be included

xxxx

12


December 2, 2019





in the notice if they weren’t already included to give participants the opportunity to change their deferral elections.

Elimination of One or More Safe Harbor Hardship Withdrawal Reasons – A plan sponsor may select one or all of the safe harbor reasons and still comply with the requirements.

Impact on Nonqualified Plans – The

Treasury Department and IRS found that

Congress’ concerns that led to the BBA

provision eliminating the suspension of

participant deferral contributions after

receipt of a hardship withdrawal “have

little relevance to unfunded nonqualified

plans.” A plan subject to 409A or a 457(b)

plan sponsored by a tax-exempt

organization may retain its suspension

provisions or, to the extent consistent

with the regulations under 409A, the plan

may be amended to remove them. Plan

sponsors should consult with their legal

counsel regarding changes to non-

qualified plans.

Note: Fidelity does not provide legal or tax advice, and the information provided is general in nature and should not be considered legal or tax advice. Consult an attorney, tax professional, or other advisor regarding your specific legal or tax situation.

xxxx

13


December 2, 2019

Impact of the Treasury and IRS Proposed Hardship Withdrawal Regulations on Fidelity’s

Administrative Best Practices That Was Communicated to Plan Sponsors in 2018

The information in green identifies our administrative best practice that was consistent with the IRS proposed regulations.

The information in yellow identifies our administrative best practice that was changed by the IRS proposed regulations.

Type of Plan (A) Eliminate the Loan

Prerequisite

(B) Eliminate the Suspending

Elective Contributions Requirement

(C) Include

Earnings on Elective

Contributions

(D) Include QNECs

(E) Include QMACs

(F) Include 401(k) Safe Harbor *

Plan Contributions

(G) Party

Responsible for Plan Document

Amendment

401(k) Plans

Individually Designed or Non-Fidelity Document

Yes (Optional)

Yes (Mandatory,

but a plan sponsor may continue the suspension

until Dec 31, 2019)

Yes (Optional)

No (Optional)

No (Optional)

No (Optional)

Sponsor

Volume Submitter

Yes (Optional)

Yes (Mandatory,


until Dec 31, 2019)

Yes (Optional)

No (Optional)

No (Optional)

No (Optional)

Fidelity (and plan sponsor if all of

the administrative

best practices are not adopted)

xxxx

14


December 2, 2019

403(b) Plans

Individually Designed, Non-Fidelity Document or 403(b) “Sample Plan” document

Yes (Optional)

Yes (Mandatory,


until Dec 31, 2019)

No – not permitted

(No change)

No (No

change, but it is optional

for annuities )

No (No


for annuities )

N/A

Sponsor

403(b) Volume Submitter

Yes (Optional)

Yes (Mandatory,


until Dec 31, 2019)

No – not permitted

(No change)

No (No


for annuities )

No (No


for annuities )

N/A

Fidelity (and plan sponsor if all of

the administrative

best practices are not adopted)

*A safe harbor contribution plan can be as a result of nonelective or matching contributions or because of a qualified automatic contribution arrangement.

Note: The proposed regulations enable a plan sponsor to suspend or continue to allow elective employee contributions for six months following a Heroes Earnings Assistance and Relief Tax Act

of 2008 (HEART) qualified reservist distribution that is made to a participant because of a leave of absence for qualified military duty. This type of distribution treats the employee as terminated

for the sole purpose of enabling him/her to obtain deferral contributions from the plan given the circumstances, but it really is not a hardship withdrawal; it is an in-service withdrawal. The

administrative best practice is to continue the suspension of the elective employee contributions.

The content of this article is not intended to be legal advice.

Fidelity Investments Institutional Operations Company, Inc., 245 Summer Street, Boston, MA 02210

838253.10.0