By Pension and Benefits Editorial Staff
Despite liberalized hardship distribution rules (see Pension Plan Guide Newsletter No. 2372, October 1, 2019) under final regulations issued by the IRS in late 2019, most employers have not yet seen an increase in hardship withdrawal requests, according to a snapshot survey by the Plan Sponsor Council of America (PSCA), which is part of the American Retirement Association (ARA). Employers that sponsor 401(k) plans have moved quickly to incorporate the new, more liberal, hardship withdrawal provisions, but most have not yet seen an uptick in participants taking advantage of the new rules, the PSCA suggests.
The Bipartisan Budget Act of 2018 (P.L. 115-123) directed the Secretary of the Treasury to modify the rules to, among other things, delete the six-month prohibition on contributions following a hardship distribution. In September 2019, IRS final regulations broadened the definition of hardship withdrawals and reduced the penalties for taking one.
Initial reaction. Immediately following the publication of the final regulations, the PSCA conducted a brief survey to assess both the pace and scale of adoption of these new, less stringent requirements, and the participant response, if any. Nearly two-thirds (64.6 percent) of respondents have already adopted the new hardship withdrawal provisions but most respondents (72.6 percent) have not seen any change in the number of hardship withdrawals since the new provisions were implemented. Fewer than one-in-five (17.8 percent) survey respondents noted an uptick in hardship withdrawals in 2019, but, according to the PSCA, even among those that did see an increase, the vast majority (92.3 percent) are not considering any changes to their provisions at this point.
The area of most agreement among 401(k) sponsors was the provision eliminating the post-withdrawal six-month suspension of elective deferrals with 60 percent of survey respondents saying that was a “wonderful idea.”
“Pre-retirement distributions of retirement savings continues to be a matter of concern,” according to Hattie Greenan, PSCA’s director of research. Congressional action “to liberalize the requirements for hardship withdrawals is a welcome change for those who use 401(k) monies to stave off financial ruin, or cope with emergencies. However, because of the potential long-term impact of expanded hardship withdrawals, it is critical to keep a close eye on how these changes might affect retirement security,” Greenan suggested.
Other key findings. Other key survey findings include:
- About half of respondents stated that they are “OK” with the provisions to allow hardship withdrawals for casualty losses associated with federal disasters.
- More than 20 percent think the provision to allow hardship withdrawals for casualty losses associated with federal disasters is a wonderful idea, and nearly a quarter (23 percent) are largely comfortable with it but remain concerned about possible implications.
- Nearly 30 percent state that the requirement that participants take loans before accessing a hardship withdrawal is a bad idea or one where the bad outweighs the good.
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