As the Tax Cuts and Jobs Act wound its way through the legislative process last year, it morphed several times.  Many provisions that were originally proposed were dropped along the way and others were added.  This was certainly true with respect to provisions affecting employee benefits.  Readers should remember that originally the House Bill contained a provision reducing the amount an employee could defer into a 401(k) plan on a basis as part of the “Rothification” of 401(k) plans.  However, this was dropped after the President announced they would not be touching 401(k) plans.  There was also a proposal to tax all deferred compensation at vesting which was also dropped.

Another provision dropped from the tax reform legislation was reform of the rules for hardship distribution in 401(k) plans.  However, these provisions have been enacted as part of the Bipartisan Budget Act of 2018 signed by the President on February 9th.

Six Month Suspension Eliminated

The Budget Act directs the Treasury Department to modify regulations within one year to delete the 6-month prohibition on making elective deferrals to a 401(k) plan once one has received a hardship distribution.  The revised regulation is to apply to plan years beginning after 2018.  Currently, if a participant receives a hardship distribution, he or she is prohibited from making elective deferrals under the plan for 6 months.

Requirement to Exhaust Loans First Eliminated

The Budget Act also removes the replacement under current law that before taking a hardship distribution, a participant must first borrow any available loan amounts under the 401(k) plan, if the plan permits participant loans.  This provision also becomes effective next year.

New Sources for Hardship Distributions

The Budget Act also provides that after 2018, 401(k) plans can be written to permit hardship distributions from additional sources under the plan, namely employer contributions and earnings.  Currently, hardship distributions can only be taken from employee contributions and not even earnings on such contributions.  Beginning next year, plans can permit the earnings on employee contributions to be used for hardship distributions. Additionally, employer contributions such as matching, profit sharing, stock bonus, and qualified non-elective contributions can be used as well as earnings on such amounts.

Whether to permit employer contributions to be eligible for hardship distributions as a plan design feature is the discretion of the employer.  Plans are not required to permit it if allowing hardship distributions.  Making these changes will likely require amendments to the plan.

These are welcome changes that will permit employees to have access to more funds to relieve a financial hardship as a result of such things as illness, death, or national disaster, without draconian restrictions. The effect of the provisions being dropped from the Tax Cuts and Jobs Act but included in the budget Act is that the effective date was delayed by one year.