Retirement Plan Industry Update – Q4 2018
January 29, 2019
Written by Dave Westra, Partner, CFP®, AIF®, CPFA and John Brimhall, Client Advisor, CFA, CPA, CFP®
IRS Releases 2019 Contribution Limits
Hardship Distributions – Update
Effective February 9, 2018, Congress signed into law the Bipartisan Budget Act of 2018, which made changes to the hardship distribution rules for qualified retirement plans. The objective is to expand the availability of hardship distributions and simplify the administration. In November 2018, the IRS published regulations explaining how the new rules work. Below are the regulations that are effective January 1, 2019:
Elimination of the Six-Month Deferral Suspension Requirement
Historically, plans that wished to take advantage of regulatory safe harbor for hardship withdrawals were required to suspend an employee’s elective deferrals for six months following the hardship withdrawal.
Plan sponsors have several options available:
- Plan sponsors can continue to apply the six-month suspension for hardships taken in 2019. However, no suspension of salary deferrals may be applied for hardship distributions made on or after January 1, 2020.
- Plan sponsors can eliminate the six-month suspension for hardships taken in 2019.
- Plan sponsors can eliminate the six-month suspension for hardships taken in 2018.
Additional Money Sources Available for Hardship Withdrawals
Historically, IRS guidance limited hardship distributions to only employee elective deferrals. Effective January 1, 2019, a plan sponsor can elect additional money sources and earnings to be available for hardship distributions. Understand that this change is not available for 403(b) plans. It is worth noting that this is optional and plan sponsors are not required to make any additional money sources available.
- The requested amount cannot exceed the financial need, including projected taxes and penalties resulting from the distribution.
- The employee must utilize all available distributions from the plan or other plans sponsored by the employer. However, the participant is no longer required to take a loan before requesting a hardship distribution.
- The employee must represent in writing that they do not have sufficient cash or liquid assets to satisfy the financial need.
The new rules provide guidance on what is allowed. It is important for plan sponsors to work with their ERISA counsel, recordkeeper, and/or third-party administrator to ensure that their plan documents reflect their desired objectives.
Retirement Legislation May Pick Up Steam in the 116th Congress
With the Democrats taking control of the House of Representatives and Republicans retaining the Senate, many are expecting gridlock. One area we could see changes in is retirement policy. There appears to be bipartisan support to continue making enhancements to the provisions implemented with the Pension Protection Act of 2006. As industry professionals and congressional representatives acknowledge that there is a retirement savings crisis, there is support for expanding access to company sponsored retirement plans and increasing participation and savings rates.
The following are examples of retirement plan provisions that have bipartisan support:
- Offering lifetime income options in defined contribution plans
- Providing more flexibility to adopt safe harbor provisions to avoid nondiscrimination testing
- Allowing matching contributions for employees repaying student loans
- Permitting part-time employees to participate (e.g., at least 500 hours for 3 consecutive years)
- Expanding access to company sponsored retirement plans by allowing unrelated employers to participate in multiple employer plans (MEPs)
PLANSPONSOR.(2018, November 28). Maximum Benefit and Contribution Limits Table 2019. Retrieved January 15, 2019 from https://www.plansponsor.com/maximum-benefit-and-contributions-limits-table-2019/
DWC (2018, November 13). Breaking News: Hardship Distributions Becoming Even Less of a Hardship Than Previously Expected. Retrieved January 15, 2019 from https://www.dwc401k.com/blog/breaking-news-hardship-distributions-even-less-of-a-hardship-than-expected
Godbout, T. (2018, November 7). Midterm Fallout: The Impact on Retirement Issues. Retrieved January 15, 2019 from https://www.napa-net.org/news/technical-competence/legislation/midterm-fallout-the-impact-on-retirement-issues/