Pension & Benefits News IRS clarifies interim amendments for hardship distributions, extends deadline
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Tuesday, January 14, 2020

IRS clarifies interim amendments for hardship distributions, extends deadline

By Pension and Benefits Editorial Staff

The IRS has clarified which amendments are integral to a plan provision that fails to satisfy the qualification requirements by reason of a change made by recently published final hardship distribution regulations. The deadline for pre-approved plans to adopt an interim amendment relating to those regulations is extended to December 31, 2021.

Background. Rev. Proc. 2016-37 provides a six-year remedial amendment cycle system for pre-approved plans. Under this system, a pre-approved plan provider may apply for a new opinion letter once during each six-year remedial amendment cycle. To promote compliance with changes to plan qualification requirements during a six-year remedial amendment cycle, pre-approved plans must adopt an interim amendment with respect to a disqualifying provision or a provision that is integral to such a disqualifying provision.

Required amendments under final regs. The preamble for final regulations under Code Sec. 401(k) and Code Sec. 401(m) states that the IRS expects that many plans’ hardship distribution provisions will need to be amended to reflect the changes in the final regulations. Plan amendments required under the final regulations include:

  • an amendment to remove a plan provision suspending an employee’s contributions following a hardship distribution of elective deferrals; and
  • an amendment requiring an employee’s representation relating to his or her need for a hardship distribution, if the plan does not already provide for such a representation.

These “required amendments” must be effective for hardship distributions made on or after January 1, 2020. However, a required amendment may be implemented as early as the first day of the plan year that begins after December 31, 2018.

Integrally related changes requiring interim amendments. The preamble to the final regulations provides that a plan amendment modifying a plan’s hardship distribution provisions that is effective no later than the required amendment will be treated as amending a provision that is integrally related to a qualification requirement that has been changed. These provisions include:

  • the change to Code Sec. 165 relating to casualty losses;
  • the addition of the new safe harbor expense (relating to expenses incurred as a result of certain federally declared disasters); and
  • the extension of the relief under IRS Announcement 2017-15 to victims of Hurricanes Florence and Michael.

The IRS now clarifies that all plan amendments that relate to a plan’s hardship distribution provisions and that are effective no later than January 1, 2020, are treated as integral to the required amendments. This treatment applies even if the required amendments are implemented earlier than for hardship distributions made on or after January 1, 2020.

Deadline extended. An interim amendment is timely adopted if it is adopted by the end of the remedial amendment period. The remedial amendment period begins on the date on which the change becomes effective with respect to the plan or, in the case of a provision that is integral to a qualification requirement that has been changed, the first day on which the plan is operated in accordance with the provision as amended. In the case of a plan maintained by one employer, the remedial amendment period ends on the later of: (1) the due date (including extensions) for filing the income tax return for the employer’s taxable year that includes the date on which the remedial amendment period begins; or (2) the last day of the plan year that includes the date on which the remedial amendment period begins.

The IRS has extended the deadline for pre-approved plans to adopt interim amendments relating to the required plan amendments under the final regulations and amendments that are integral to those amendments to December 31, 2021.

Source: Rev. Proc. 2020-9.

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