Safe Harbor Reasons for Hardship Withdrawals Under IRS Regulations
- Used to pay unpaid medical expenses for yourself, your spouse, or any dependent.
- Used to pay for the purchase of principal residence (not regular mortgage payments).
- Used to pay up to 12 months of tuition and related educational fees (including room and board) for the post-secondary education of participant, participant’s spouse, participant’s children, or other dependent.
- Used to prevent eviction or foreclosure on participant’s mortgage on principal residence.
- Used to pay funeral or burial expenses for deceased parent, spouse, child, or dependent.
- Used to pay expenses to repair damage to principal residence (provided the expenses would qualify for a casualty loss deduction on participant’s tax return, without regard to 10% adjusted gross income limit).
What you should know
- The Internal Revenue Service (IRS) finalized regulations expanding the availability of hardship withdrawals on September 23, 2019.
- The final regulations differ little from IRS proposed regulations published November 14, 2018, reflect changes made under the Bipartisan Budget Act of 2018, and provide updates reflecting changes (already in practice) made under the Heroes Earning Assistance and Relief Act of 2008 (HEART Act) and the Pension Protection Act of 2006 (PAP 2006).
- Plans must eliminate the six-month suspension of employee contributions (including pre-tax, after-tax, and Roth) for hardship withdrawals made on and after January 1, 2020.
- The requirement to take all available plan loans before taking a hardship withdrawal has been eliminated. Plans may choose to continue imposing the requirement to first take a loan, if so desired.
- All earnings on employees’ elective contributions are now available for hardship withdrawal. If applicable, plan sponsors may now include Qualified Non-Elective Contributions (QNECs), Qualified Matching Contributions (QMACs), and traditional Safe Harbor Contributions (whether matching or non-elective) and earnings on such contributions in the amount available for hardship withdrawal. Plans may choose to continue restricting earnings and employer contributions, if so desired.
If you used a pre-approved plan, a plan amendment relating to these changes will be generated for your signature by your document provider.
Plan sponsors who use individually designed plans should consult their ERISA counsel, obtain the necessary plan amendment, and provide a copy of the amendment to their recordkeeper.