Hardship Distributions of Elective Contributions, Qualified Matching Contributions, Qualified Nonelective Contributions, and Earnings, 56763-56768 [2018-24812]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 83, Number 220 (Wednesday, November 14, 2018)]
[Proposed Rules]
[Pages 56763-56768]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24812]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-107813-18]
RIN-1545-BO82


Hardship Distributions of Elective Contributions, Qualified 
Matching Contributions, Qualified Nonelective Contributions, and 
Earnings

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed amendments to the regulations 
relating to hardship distributions from section 401(k) plans. The 
amendments reflect statutory changes affecting section 401(k) plans, 
including recent changes made by the Bipartisan Budget Act of 2018. 
These regulations would affect participants in, beneficiaries of, 
employers maintaining, and administrators of plans that contain cash or 
deferred arrangements or provide for employee or matching 
contributions.

DATES: Comments and requests for a public hearing must be received by 
January 14, 2019.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-107813-18) Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
107813-18), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW, Washington, DC 20224, or sent electronically via the Federal 
eRulemaking Portal at www.regulations.gov/ (indicate IRS and REG-
107813-18).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Roger Kuehnle at (202) 317-6060 or; concerning submissions of comments, 
the hearing, or to be placed on the building access list to attend the 
hearing, Regina L. Johnson at (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking will be submitted, under approval number 1545-1669, to the 
Office of Management and Budget in accordance with the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection 
of information should be sent to the Office of Management and Budget, 
Attn: Desk Officer for the Department of the Treasury, Office of 
Information and Regulatory Affairs, Washington, DC 20503, with copies 
to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, 
SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of 
information should be received by January 14, 2019. Comments are 
specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the IRS, including whether the 
information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collection of information in this proposed regulation is in 
Sec.  1.401(k)-1(d)(3)(iii)(B). The collection of information relates 
to the certification by participants in section 401(k) plans that they 
have insufficient cash or other liquid assets to cover expenses 
resulting from a hardship and, thus, will need a distribution from the 
plan to meet the expenses. The collections of information are required 
to obtain a benefit.
    The likely recordkeepers are individuals.
    Estimated total annual reporting burden: 101,250 hours.
    Estimated average annual burden per respondent: 45 minutes.
    Estimated number of respondents: 135,000.
    Estimated frequency of responses: On occasion.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.

Background

Section 401(k)

    Section 401(k)(1) of the Internal Revenue Code (Code) provides that 
a profit-sharing, stock bonus, pre-ERISA money purchase, or rural 
cooperative plan will not fail to qualify under section 401(a) merely 
because it contains a cash or deferred arrangement (CODA) that is a 
qualified CODA. Under section 401(k)(2), a CODA (generally, an 
arrangement providing for an election by an employee between 
contributions to a plan or payments directly in cash) constitutes a 
qualified CODA only if it satisfies certain requirements. Section 
401(k)(2)(B) provides that contributions made pursuant to a qualified 
CODA (referred to as ``elective contributions'') may be distributed 
only on or after the occurrence of certain events, including death, 
disability, severance from employment, termination of the plan, 
attainment of age 59-\1/2\, hardship, or, in the case of a qualified 
reservist distribution, the date a reservist is called to active duty. 
Section 401(k)(2)(C) requires that elective contributions be 
nonforfeitable at all times.
    Section 401(k)(3)(A)(ii) requires that elective contributions 
satisfy the actual deferral percentage (ADP) test set forth in section 
401(k)(3). Sections 401(k)(11), 401(k)(12), and 401(k)(13) each provide 
an alternative method of meeting the ADP test. Under section 
401(k)(3)(D), qualified nonelective contributions (QNECs) and qualified 
matching contributions (QMACs), as described in

[[Page 56764]]

sections 401(m)(4)(C) and 401(k)(3)(D)(ii)(I), respectively, are 
permitted to be taken into account under the ADP test. Among other 
requirements, QNECs and QMACs must satisfy the distribution limitations 
of section 401(k)(2)(B) and the nonforfeitability requirements of 
section 401(k)(2)(C). Similarly, employer contributions that are made 
pursuant to the safe harbor plan designs of section 401(k)(12) or (13) 
must meet the distribution limitations of section 401(k)(2)(B).
    Section 401(m)(2)(A) requires that matching contributions and 
employee contributions satisfy the actual contribution percentage (ACP) 
test set forth in section 401(m)(2). Sections 401(m)(10), 401(m)(11), 
and 401(m)(12) each provide an alternative method of meeting the ACP 
test with respect to matching contributions. As with contributions made 
to section 401(k) plans pursuant to safe harbor plan designs, employer 
contributions made pursuant to the safe harbor plan designs of section 
401(m)(11) or (12) must meet the distribution limitations of section 
401(k)(2)(B).
    The Department of the Treasury (Treasury Department) and the IRS 
issued comprehensive final regulations under sections 401(k) and 401(m) 
on December 29, 2004 (TD 9169, 69 FR 78143). Since that time, the 
regulations have been updated to reflect certain subsequent changes to 
the applicable statute (see TD 9237, 71 FR 6, and TD 9324, 72 FR 21103, 
providing guidance on designated Roth contributions under section 402A; 
and TD 9447, 74 FR 8200, providing guidance on section 401(k)(13)). 
However, the regulations have not been updated to reflect other 
statutory changes. The regulations have been amended to address other 
specific issues (see TD 9319, 72 FR 16878, relating to the definition 
of compensation; TD 9641, 78 FR 68735, relating to mid-year amendments 
to safe harbor plan designs; and TD 9835, 83 FR 34469, relating to 
whether QNECs and QMACs must be nonforfeitable when contributed to the 
plan).
    Section 1.401(k)-1(d)(3) provides rules for determining whether a 
distribution is made on account of an employee's hardship. Under those 
rules, a distribution is made on account of hardship only if the 
distribution is made on account of an immediate and heavy financial 
need and the amount of the distribution is not in excess of the amount 
necessary to satisfy that need (plus any amounts necessary to pay any 
taxes or penalties reasonably anticipated to result from the 
distribution). These determinations must be made on the basis of all 
the relevant facts and circumstances and in accordance with 
nondiscriminatory and objective standards set forth in the plan.
    Section 1.401(k)-1(d)(3)(iv)(B) provides that a distribution is not 
treated as necessary to satisfy an immediate and heavy financial need 
of an employee to the extent the need may be relieved from other 
resources that are reasonably available to the employee. Under Sec.  
1.401(k)-1(d)(3)(iv)(C), in determining whether the need can be 
relieved from other resources that are reasonably available to an 
employee, the employer may rely on the employee's representation 
(unless the employer has actual knowledge to the contrary) that the 
need cannot reasonably be relieved from resources specified in Sec.  
1.401(k)-1(d)(3)(iv)(C).
    To simplify administration, the regulations provide certain safe 
harbors that may be used to determine whether a distribution is made on 
account of an employee's hardship. Specifically, Sec.  1.401(k)-
1(d)(3)(iii)(B) provides a safe harbor under which distributions for 
six types of expenses are deemed to be made on account of an immediate 
and heavy financial need. One of the six types is ``expenses for the 
repair of damage to the employee's principal residence that would 
qualify for the casualty deduction under section 165 (determined 
without regard to whether the loss exceeds 10% of adjusted gross 
income).''
    In addition, Sec.  1.401(k)-1(d)(3)(iv)(E) provides a safe harbor 
under which a distribution is deemed necessary to satisfy an immediate 
and heavy financial need. Under that safe harbor, an employee must 
first obtain all currently available distributions (including 
distributions of employee stock ownership plan (ESOP) dividends under 
section 404(k), but not hardship distributions), and nontaxable plan 
loans from the plan and any other plan maintained by the employer. 
Under the safe harbor, an employee's ability to make elective 
contributions and employee contributions to the plan (and any other 
plan maintained by the employer) must be suspended for at least 6 
months after receipt of the hardship distribution. Pursuant to Sec.  
1.401(k)-3(c)(6)(v)(B), in the case of a safe harbor plan described in 
section 401(k)(12) or (13), the suspension period may not exceed 6 
months.
    Under Sec.  1.401(k)-1(d)(3)(ii), the maximum amount that may be 
distributed on account of hardship is the total of the employee's 
elective contributions that have not previously been distributed (plus 
earnings, QNECs, and QMACs credited before a specified grandfather date 
that generally is before 1989). Thus, the maximum amount that may be 
distributed on account of hardship does not include earnings, QNECs, or 
QMACs that are not grandfathered.

Section 403(b)

    Section 403(b)(7)(A)(ii) provides distribution limitations on 
amounts contributed to a custodial account that is treated as a section 
403(b) annuity contract. Section 403(b)(11) provides that contributions 
made pursuant to a salary reduction agreement (within the meaning of 
section 402(g)(3)(C)) (generally referred to in the regulations under 
section 403(b) as ``section 403(b) elective deferrals'') may be 
distributed only on or after the occurrence of certain events, one of 
which is the employee's hardship. Section 403(b)(11) also provides that 
no income attributable to these contributions may be distributed on 
account of hardship.
    Section 1.403(b)-6 provides rules for applying these distribution 
limitations. Section 1.403(b)-6(b) applies to distributions of amounts 
that are neither attributable to section 403(b) elective deferrals nor 
made from custodial accounts, Sec.  1.403(b)-6(c) applies to 
distributions from custodial accounts that are not attributable to 
section 403(b) elective deferrals, and Sec.  1.403(b)-6(d) applies to 
distributions of amounts attributable to section 403(b) elective 
deferrals. Section 1.403(b)-6(d)(2) provides that a hardship 
distribution of section 403(b) elective deferrals is subject to the 
rules and restrictions set forth in Sec.  1.401(k)-1(d)(3) and is 
limited to the aggregate dollar amount of a participant's section 
403(b) elective deferrals, without earnings thereon.

Statutory Changes Relating to Section 401(k)

    Section 41113 of the Bipartisan Budget Act of 2018, Public Law 115-
123 (BBA 2018), directs the Secretary of the Treasury to modify Sec.  
1.401(k)-1(d)(3)(iv)(E) to (1) delete the 6-month prohibition on 
contributions following a hardship distribution, and (2) make any other 
modifications necessary to carry out the purposes of section 
401(k)(2)(B)(i)(IV). Section 41114 of BBA 2018 modifies the hardship 
distribution rules under section 401(k)(2)(B) by adding section 
401(k)(14)(A) to the Code, which states that the maximum amount 
available for distribution upon hardship includes (i) contributions to 
a profit-sharing or stock bonus plan to which section 402(e)(3) 
applies, (ii) QNECs, (iii) QMACs, and (iv) earnings on these 
contributions. Section 41114 of BBA 2018 also adds

[[Page 56765]]

section 401(k)(14)(B) to the Code, which provides that a distribution 
is not treated as failing to be made upon the hardship of an employee 
solely because the employee does not take any available loan under the 
plan.
    Section 11044 of the Tax Cuts and Jobs Act, Public Law 115-97 
(TCJA), added section 165(h)(5) to the Code. Section 165(h)(5) provides 
that, for taxable years 2018 through 2025, the deduction for a personal 
casualty loss generally is available only to the extent the loss is 
attributable to a federally declared disaster (as defined in section 
165(i)(5)).
    Section 826 of the Pension Protection Act of 2006, Public Law 109-
280 (PPA `06), directs the Secretary of the Treasury to modify the 
rules relating to hardship distributions to permit a section 401(k) 
plan to treat a participant's beneficiary under the plan the same as 
the participant's spouse or dependent in determining whether the 
participant has incurred a hardship. Notice 2007-07, 2007-5 I.R.B. 395, 
provides guidance for applying this provision.
    Section 827(a) of PPA `06 added to the Code section 72(t)(2)(G), 
which exempts certain distributions from the application of the section 
72(t) additional income tax on early distributions. These 
distributions, referred to as ``qualified reservist distributions,'' 
include distributions attributable to elective contributions that are 
made during the period that a reservist has been called to active duty. 
Section 827(b)(1) of PPA `06 added section 401(k)(2)(B)(i)(V) to the 
Code, which permits qualified reservist distributions to be made from a 
section 401(k) plan.\1\
---------------------------------------------------------------------------

    \1\ While section 827(b)(2) and (3) of PPA `06 amended sections 
403(b)(7)(A)(ii) and 403(b)(11) to permit qualified reservist 
distributions to be made from a section 403(b) plan, the regulations 
under section 403(b) have not yet been updated to reflect these 
statutory amendments.
---------------------------------------------------------------------------

    Section 105(b)(1)(A) of the Heroes Earnings Assistance and Relief 
Tax Act of 2008, Public Law 110-245 (HEART Act), added section 
414(u)(12) to the Code. Section 414(u)(12)(B)(ii) provides for a 6-
month suspension of elective contributions and employee contributions 
after certain distributions to individuals performing service in the 
uniformed services.

Explanation of Provisions

Overview

    These proposed regulations update the section 401(k) and (m) 
regulations to reflect: (1) The enactment of (a) sections 41113 and 
41114 of BBA 2018, (b) sections 826 and 827 of PPA '06, and (c) section 
105(b)(1)(A) of the HEART Act; and (2) the application of the hardship 
distribution rules in light of the modification to the casualty loss 
deduction rules made by section 11044 of the TCJA.

Deemed Immediate and Heavy Financial Need

    The proposed regulations modify the safe harbor list of expenses in 
current Sec.  1.401(k)-1(d)(3)(iii)(B) for which distributions are 
deemed to be made on account of an immediate and heavy financial need 
by: (1) Adding ``primary beneficiary under the plan'' as an individual 
for whom qualifying medical, educational, and funeral expenses may be 
incurred; (2) modifying the expense listed in Sec.  1.401(k)-
1(d)(3)(iii)(B)(6) (relating to damage to a principal residence that 
would qualify for a casualty deduction under section 165) to provide 
that for this purpose the new limitations in section 165(h)(5) (added 
by section 11044 of the TCJA) do not apply; and (3) adding a new type 
of expense to the list, relating to expenses incurred as a result of 
certain disasters. This new safe harbor expense is similar to relief 
given by the IRS after certain major federally declared disasters, such 
as the relief relating to Hurricane Maria and California wildfires 
provided in Announcement 2017-15, 2017-47 I.R.B. 534, and is intended 
to eliminate any delay or uncertainty concerning access to plan funds 
following a disaster that occurs in an area designated by the Federal 
Emergency Management Agency (FEMA) for individual assistance.

Distribution Necessary To Satisfy Financial Need

    Pursuant to BBA 2018 sections 41113 and 41114, the proposed 
regulations modify the rules for determining whether a distribution is 
necessary to satisfy an immediate and heavy financial need by 
eliminating (1) any requirement that an employee be prohibited from 
making elective contributions and employee contributions after receipt 
of a hardship distribution, and (2) any requirement to take plan loans 
prior to obtaining a hardship distribution. In particular, the proposed 
regulations eliminate the safe harbor in current Sec.  1.401(k)-
1(d)(3)(iv)(E), under which a distribution is deemed necessary to 
satisfy the financial need only if elective contributions and employee 
contributions are suspended for at least 6 months after a hardship 
distribution is made and, if available, nontaxable plan loans are 
taken.
    In addition, the proposed regulations eliminate the rules in 
current Sec.  1.401(k)-1(d)(3)(iv)(B) (under which the determination of 
whether a distribution is necessary to satisfy a financial need is 
based on all the relevant facts and circumstances) and provide one 
general standard for determining whether a distribution is necessary. 
Under this general standard, a hardship distribution may not exceed the 
amount of an employee's need (including any amounts necessary to pay 
any federal, state, or local income taxes or penalties reasonably 
anticipated to result from the distribution), the employee must have 
obtained other available distributions under the employer's plans, and 
the employee must represent that he or she has insufficient cash or 
other liquid assets to satisfy the financial need. A plan administrator 
may rely on such a representation unless the plan administrator has 
actual knowledge to the contrary. In light of the timing of the 
publication of these proposed regulations, the requirement to obtain 
this representation would only apply for a distribution that is made on 
or after January 1, 2020.
    The proposed regulations clarify that a plan generally may provide 
for additional conditions, such as those described in 26 CFR 1.401(k)-
1(d)(3)(iv)(B) and (C) (revised as of April 1, 2018) or, for 
distributions made before January 1, 2020, the representation described 
in the preceding paragraph, to demonstrate that a distribution is 
necessary to satisfy an immediate and heavy financial need of an 
employee. To implement Congress' purpose in enacting section 41113 of 
BBA 2018 (for example, Congress' concern that a suspension impedes an 
employee's ability to replace distributed funds), the proposed 
regulations do not permit a plan to provide for a suspension of 
elective contributions or employee contributions as a condition of 
obtaining a hardship distribution. However, in light of the timing of 
the publication of these proposed regulations, this prohibition would 
only apply for a distribution that is made on or after January 1, 2020.

Expanded Sources for Hardship Distributions

    Pursuant to section 41114 of BBA 2018, the proposed regulations 
modify Sec.  1.401(k)-1(d)(3) to permit hardship distributions from 
section 401(k) plans of elective contributions, QNECs, QMACs, and 
earnings on these amounts, regardless of when contributed or earned. 
However, plans may limit the type of contributions available for

[[Page 56766]]

hardship distributions and whether earnings on those contributions are 
included. Safe harbor contributions made to a plan described in section 
401(k)(13) may also be distributed on account of an employee's hardship 
(because these contributions are subject to the same distribution 
limitations applicable to QNECs and QMACs). See Sec.  1.401(k)-
3(k)(3)(i).

Section 403(b) Plans

    Section 1.403(b)-6(d)(2) provides that a hardship distribution of 
section 403(b) elective deferrals is subject to the rules and 
restrictions set forth in Sec.  1.401(k)-1(d)(3); thus, the proposed 
new rules relating to a hardship distribution of elective contributions 
from a section 401(k) plan generally apply to section 403(b) plans. 
However, Code section 403(b)(11) was not amended by section 41114 of 
BBA 2018; therefore, income attributable to section 403(b) elective 
deferrals continues to be ineligible for distribution on account of 
hardship.
    Amounts attributable to QNECs and QMACs may be distributed from a 
section 403(b) plan on account of hardship only to the extent that, 
under Sec.  1.403(b)-6(b) and (c), hardship is a permitted 
distributable event for amounts that are not attributable to section 
403(b) elective deferrals. Thus, QNECs and QMACs in a section 403(b) 
plan that are not in a custodial account may be distributed on account 
of hardship, but QNECs and QMACs in a section 403(b) plan that are in a 
custodial account continue to be ineligible for distribution on account 
of hardship.

Relief for Victims of Hurricanes Florence and Michael

    The Treasury Department and the IRS realize that employees 
adversely affected by Hurricane Florence or Hurricane Michael may need 
expedited access to plan funds. Accordingly, the relief provided under 
Announcement 2017-15 is extended to similarly situated victims of 
Hurricanes Florence and Michael, except that the ``Incident Dates'' (as 
defined in that announcement) are as specified by FEMA for these 2018 
hurricanes, relief is provided through March 15, 2019, and any 
necessary amendments must be made no later than the deadline for plan 
amendments set forth in this preamble under Plan Amendments.

Applicability Dates and Reliance

    The changes to the hardship distribution rules made by BBA 2018 are 
effective for plan years beginning after December 31, 2018, and the 
proposed regulations provide that they generally would apply to 
distributions made in plan years beginning after December 31, 2018. 
However, the prohibition on suspending an employee's elective 
contributions and employee contributions as a condition of obtaining a 
hardship distribution may be applied as of the first day of the first 
plan year beginning after December 31, 2018, even if the distribution 
was made in the prior plan year. Thus, for example, a calendar-year 
plan that provides for hardship distributions under the pre-2019 safe 
harbor standards may be amended to provide that an employee who 
receives a hardship distribution in the second half of the 2018 plan 
year will be prohibited from making contributions only until January 1, 
2019 (or may continue to provide that contributions will be suspended 
for the originally scheduled 6 months).
    In addition, the revised list of safe harbor expenses may be 
applied to distributions made on or after a date that is as early as 
January 1, 2018. Thus, for example, a plan that made hardship 
distributions relating to casualty losses deductible under section 165 
without regard to the changes made to section 165 by the TCJA (which, 
effective in 2018, require that, to be deductible, losses must result 
from a federally declared disaster) may be amended to apply the revised 
safe harbor expense relating to casualty losses to distributions made 
in 2018 so that plan provisions will conform to the plan's operation. 
Similarly, a plan may be amended to apply the revised safe harbor 
expense relating to losses (including loss of income) incurred by an 
employee on account of a disaster that occurs in 2018 (such as 
Hurricane Florence or Hurricane Michael), provided that the employee's 
principal residence or principal place of employment at the time of the 
disaster was located in an area designated by FEMA for individual 
assistance with respect to the disaster.

Plan Amendments

    The Treasury Department and the IRS expect that, if these 
regulations are finalized as they have been proposed, plan sponsors 
will need to amend their plans' hardship distribution provisions. The 
deadline for amending a disqualifying provision is set forth in Rev. 
Proc. 2016-37, 2016-29 I.R.B. 136. For example, with respect to an 
individually designed plan that is not a governmental plan, the 
deadline for amending the plan to reflect a change in qualification 
requirements is the end of the second calendar year that begins after 
the issuance of the Required Amendments List described in section 9 of 
Rev. Proc. 2016-37 that includes the change. A plan provision that is 
not a disqualifying provision, but is integrally related to a plan 
provision that is a disqualifying provision, may be amended by the same 
deadline applicable to a disqualifying provision.
    A plan amendment that is related to the final regulations, but does 
not correct a disqualifying provision, including a plan amendment 
reflecting (1) the change to section 165 (relating to casualty losses) 
or (2) the addition of the new safe harbor expense (relating to 
expenses incurred as a result of certain federally declared disasters), 
will be treated as integrally related to a disqualifying provision. 
Therefore all amendments that relate to the final regulations will have 
the same amendment deadline. This deadline will also apply to an 
amendment reflecting the extension of the relief under Announcement 
2017-15 to victims of Hurricanes Florence and Michael, as provided in 
this preamble.

Special Analyses

    The Administrator of the Office of Information and Regulatory 
Affairs (OIRA), Office of Management and Budget, has waived review of 
this proposed rule in accordance with section 6(a)(3)(A) of Executive 
Order 12866. OIRA will subsequently make a significance determination 
of the final rule, pursuant to section 3(f) of Executive Order (E.O.) 
12866 and the April 11, 2018, Memorandum of Agreement between the 
Department of the Treasury and the Office of Management and Budget 
(OMB).
    Because these regulations do not impose a collection of information 
on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) 
does not apply. Pursuant to section 7805(f) of the Code, these 
regulations have been submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on their impact on small 
business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES heading. 
The Treasury Department and the IRS request comments on all aspects of 
the proposed rules. All comments will be available at 
www.regulations.gov or upon request. A public hearing will be scheduled 
if requested in writing by any person that timely submits written

[[Page 56767]]

comments. If a public hearing is scheduled, notice of the date, time, 
and place for the public hearing will be published in the Federal 
Register.

Drafting Information

    The principal author of these regulations is Roger Kuehnle of the 
Office of Associate Chief Counsel (Tax Exempt and Governmental 
Entities). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 401(m)(9) and 26 U.S.C. 7805 * * *

0
Par. 2. Section 1.401(k)-1 is amended by:
0
1. Revising paragraphs (d)(1)(ii) and (iii) and adding new paragraph 
(d)(1)(iv).
0
2. Removing paragraph (d)(3)(ii) and redesignating paragraphs 
(d)(3)(iii), (iv) and (v) as paragraphs (d)(3)(ii), (iii) and (iv).
0
3. Revising newly redesignated paragraph (d)(3)(ii)(B) and adding new 
paragraph (d)(3)(ii)(C).
0
4. Revising newly redesignated paragraphs (d)(3)(iii) and (iv) and 
adding new paragraph (d)(3)(v).
0
5. In paragraph (d)(6), removing examples 3, 4, and 5 and redesignating 
example 6 as example 3.
    The additions and revisions read as follows:


Sec.  1.401(k)-1  Certain cash or deferred arrangements.

* * * * *
    (d) * * *
    (1) * * *
    (ii) In the case of a profit-sharing, stock bonus or rural 
cooperative plan--
    (A) The employee's attainment of age 59 \1/2\; or
    (B) In accordance with section 401(k)(14), the employee's hardship;
    (iii) In accordance with section 401(k)(10), the termination of the 
plan; or
    (iv) In the case of a qualified reservist distribution defined in 
section 72(t)(2)(G)(iii), the date the reservist was ordered or called 
to active duty.
* * * * *
    (3) * * *
    (ii) * * *
    (B) Deemed immediate and heavy financial need. A distribution is 
deemed to be made on account of an immediate and heavy financial need 
of the employee if the distribution is for--
    (1) Expenses for (or necessary to obtain) medical care that would 
be deductible under section 213(d), determined without regard to the 
limitations in section 213(a) (relating to the applicable percentage of 
adjusted gross income and the recipients of the medical care) provided 
that, if the recipient of the medical care is not listed in section 
213(a), the recipient is a primary beneficiary under the plan;
    (2) Costs directly related to the purchase of a principal residence 
for the employee (excluding mortgage payments);
    (3) Payment of tuition, related educational fees, and room and 
board expenses, for up to the next 12 months of post-secondary 
education for the employee, for the employee's spouse, child or 
dependent (as defined in section 152 without regard to section 
152(b)(1), (b)(2) and (d)(1)(B)), or for a primary beneficiary under 
the plan;
    (4) Payments necessary to prevent the eviction of the employee from 
the employee's principal residence or foreclosure on the mortgage on 
that residence;
    (5) Payments for burial or funeral expenses for the employee's 
deceased parent, spouse, child or dependent (as defined in section 152 
without regard to section 152(d)(1)(B)) or for a deceased primary 
beneficiary under the plan;
    (6) Expenses for the repair of damage to the employee's principal 
residence that would qualify for the casualty deduction under section 
165 (determined without regard to section 165(h)(5) and whether the 
loss exceeds 10% of adjusted gross income); or
    (7) Expenses and losses (including loss of income) incurred by the 
employee on account of a disaster declared by the Federal Emergency 
Management Agency (FEMA) under the Robert T. Stafford Disaster Relief 
and Emergency Assistance Act, Public Law 100-707, provided that the 
employee's principal residence or principal place of employment at the 
time of the disaster was located in an area designated by FEMA for 
individual assistance with respect to the disaster.
    (C) Primary beneficiary under the plan. For purposes of paragraph 
(d)(3)(ii)(B) of this section, a ``primary beneficiary under the plan'' 
is an individual who is named as a beneficiary under the plan and has 
an unconditional right, upon the death of the employee, to all or a 
portion of the employee's account balance under the plan.
    (iii) Distribution necessary to satisfy financial need--(A) 
Distribution may not exceed amount of need. A distribution is treated 
as necessary to satisfy an immediate and heavy financial need of an 
employee only to the extent the amount of the distribution is not in 
excess of the amount required to satisfy the financial need (including 
any amounts necessary to pay any federal, state, or local income taxes 
or penalties reasonably anticipated to result from the distribution).
    (B) No alternative means reasonably available. A distribution is 
not treated as necessary to satisfy an immediate and heavy financial 
need of an employee unless the employee has obtained all other 
currently available distributions (including distributions of ESOP 
dividends under section 404(k), but not hardship distributions) under 
the plan and all other plans of deferred compensation, whether 
qualified or nonqualified, maintained by the employer. In addition, for 
a distribution that is made on or after January 1, 2020, the employee 
must represent (in writing, by an electronic medium, or in such other 
form as may be prescribed by the Commissioner) that he or she has 
insufficient cash or other liquid assets to satisfy the need. The plan 
administrator may rely on the employee's representation unless the plan 
administrator has actual knowledge to the contrary.
    (C) Additional conditions. A plan generally may provide for 
additional conditions, such as those described in 26 CFR 1.401(k)-
1(d)(3)(iv)(B) and (C) (revised as of April 1, 2018) or, for 
distributions made before January 1, 2020, the representation described 
in paragraph (d)(3)(iii)(B) of this section, to demonstrate that a 
distribution is necessary to satisfy an immediate and heavy financial 
need of an employee. For example, a plan may provide that, before a 
hardship distribution may be made, an employee must obtain all 
nontaxable loans (determined at the time a loan is made) available 
under the plan and all other plans maintained by the employer. However, 
for a distribution that is made on or after January 1, 2020, a plan may 
not provide for a suspension of an employee's elective contributions or 
employee contributions as a condition of obtaining a hardship 
distribution.
    (iv) Commissioner may expand standards. The Commissioner may 
prescribe additional guidance of general applicability, published in 
the Internal Revenue Bulletin (see Sec.  601.601(d)(2) of

[[Page 56768]]

this chapter), expanding the list of distributions deemed to be made on 
account of immediate and heavy financial needs and setting forth 
additional methods to demonstrate that a distribution is necessary to 
satisfy an immediate and heavy financial need.
    (v) Effective/applicability date--(A) General rule. This paragraph 
(d)(3) applies to distributions made in plan years beginning after 
December 31, 2018. Except as otherwise provided in this paragraph 
(d)(3)(v), the rules in 26 CFR 1.401(k)-1(d)(3) (revised as of April 1, 
2018) apply to distributions made in plan years beginning before 
January 1, 2019.
    (B) Options for earlier application. The last sentence of paragraph 
(d)(3)(iii)(C) of this section (prohibiting the suspension of 
contributions as a condition of obtaining a hardship distribution) may 
be applied as of the first day of the first plan year beginning after 
December 31, 2018, even if the distribution was made in the prior plan 
year. Thus, for example, a calendar-year plan that provides for 
hardship distributions under the rules in 26 CFR 1.401(k)-
1(d)(3)(iv)(E) (revised as of April 1, 2018) may be amended to provide 
that an employee who receives a hardship distribution in the second 
half of the 2018 plan year will be prohibited from making contributions 
only until January 1, 2019 (or may continue to provide that 
contributions will be suspended for the originally scheduled 6 months). 
In addition, paragraph (d)(3)(ii)(B) of this section may be applied to 
distributions made on or after a date that is as early as January 1, 
2018.
* * * * *
0
Par. 3. Section 1.401(k)-3 is amended by:
0
1. Revising paragraph (c)(6)(v).
0
2. Removing the language ``, and, in the case of a hardship 
distribution, suspends an employee's ability to make elective 
contributions for 6 months in accordance with Sec.  1.401(k)-
1(d)(3)(iv)(E)'' in the fifth sentence in paragraph (c)(7), Example 1.
0
3. Removing the second sentence in paragraph (j)(2)(iv).
    The revision reads as follows:


Sec.  1.401(k)-3  Safe harbor requirements.

* * * * *
    (c) * * *
    (6) * * *
    (v) Restrictions due to limitations under the Internal Revenue 
Code. A plan may limit the amount of elective contributions made by an 
eligible employee under a plan--
    (A) Because of the limitations of section 402(g) or 415;
    (B) Due to a suspension under section 414(u)(12)(B)(ii); or
    (C) Because, on account of a hardship distribution made before 
January 1, 2020, an employee's ability to make elective contributions 
has been suspended for 6 months.
* * * * *


Sec.  1.401(k)-6  [Amended]

0
Par. 4. Section 1.401(k)-6 is amended by:
0
1. Removing the fourth sentence in paragraph (2) of the definition of 
Eligible employee.
0
2. Removing the language ``, except as provided otherwise in Sec.  
1.401(k)-1(c) and (d),'' in the definitions of Qualified matching 
contributions (QMACs) and Qualified nonelective contributions (QNECs).
0
Par. 5. Section 1.401(m)-3 is amended by revising paragraph (d)(6)(v) 
to read as follows:


Sec.  1.401(m)-3  Safe harbor requirements.

* * * * *
    (d) * * *
    (6) * * *
    (v) Restrictions due to limitations under the Internal Revenue 
Code. A plan may limit the amount of contributions made by an eligible 
employee under a plan--
    (A) Because of the limitations of section 402(g) or section 415;
    (B) Due to a suspension under section 414(u)(12)(B)(ii); or
    (C) Because, on account of a hardship distribution made before 
January 1, 2020, an employee's ability to make contributions has been 
suspended for 6 months.
* * * * *

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2018-24812 Filed 11-9-18; 4:15 pm]
BILLING CODE 4830-01-P