Compliance News | March 13, 2020

Reminders about 403(b) Plans and Hardship Distributions

This is a reminder about two compliance issues that might need plan sponsor attention at this time: the March 31, 2020 deadline for correcting 403(b) plan documents and the need for operational compliance with hardship distribution procedural changes for 401(k) and 403(b) plans.

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March 31 is the deadline for correcting 403(b) plan document language

Sponsors of 403(b) plans* have until March 31, 2020, to retroactively correct (back to January 1, 2010) any defects in their plan document language. The March 31, 2020 date applies regardless of plan year.

Plan sponsors have a few options for correcting those defects:

  • Make plan amendments
  • Restate the existing plan as an individually designed plan
  • Adopt a “pre-approved” plan document provided by a recordkeeper or other vendor

After March 31, 2020, sponsors will no longer be able to self-correct plan language problems dating back to 2010. Instead, they will have to use one of the other IRS correction programs described in the Employee Plans Compliance Resolution System: the voluntary compliance program or audit closing agreements.

Operational compliance with hardship distribution rules for 401(k) and 403(b) plans is required now

The Bipartisan Budget Act of 2018 made several changes to the requirements for hardship distributions from 401(k) and 403(b) plans. Plans will need to comply operationally with the following provisions. These changes took effect on January 1, 2020 (regardless of plan year):

  • Elimination of the six-month suspension rule — Plan sponsors can no longer suspend a participant’s ability to make elective deferral contributions on account of a hardship withdrawal.
  • Participant representation standard in effect — Plans must use this standard to determine whether a distribution satisfies a financial need, instead of the “facts-and-circumstances” standard. Under the general standard, a participant represents that he/she has insufficient cash or other liquid assets to satisfy the financial need.

Beginning with the 2019 plan year, these provisions are optional:

  • Available loans first requirement — Plan sponsors may decide to retain or eliminate the requirement that a participant must take all available plan loans prior to requesting a hardship distribution.
  • Additional hardship distribution sources — Plan sponsors may permit hardship distributions to be made from qualified nonelective contributions (QNECs), qualified matching contributions (QMACs) and traditional and QACA safe harbor contributions as well as from elective deferrals. Hardship distributions also may be made from earnings attributable to amounts in any of the above accounts. Special rules apply to 403(b) plans.

Another reminder

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act), raised issues that might need plan sponsor attention now. For details, refer to our Update on the SECURE Act.

*Generally, only public educational organizations, non-taxable entities described in Internal Revenue Code §501(c)(3), which include, among other entities, private tax-exempt colleges and tax-exempt hospitals and churches, may sponsor 403(b) plans.

This publication is for informational purposes only and does not constitute legal or tax advice. Plan sponsors are encouraged to discuss the issues raised here with their legal, tax and other advisors before determining how they apply to their specific situation.

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.

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