Hardship Distributions of Elective Contributions, Qualified Matching Contributions, Qualified Nonelective Contributions, and Earnings, 49651-49659 [2019-20511]
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Federal Register / Vol. 84, No. 184 / Monday, September 23, 2019 / Rules and Regulations
the CBP regulations regarding statement
processing and ACH and made certain
technical corrections to the CBP
regulations. Among the amendments in
the interim final rule were instructions
that changed the word ‘‘Customs’’ to
‘‘CBP’’ in 19 CFR 24.25(a), but
inadvertently cited the wrong sentence.
This document corrects that error.
List of Subjects in 19 CFR Part 24
Accounting, Claims, Harbors,
Reporting and recordkeeping
requirements, Taxes.
Amendments to the Regulations
For the reasons stated above, part 24
of title 19 of the Code of Federal
Regulations (19 CFR part 24) is
amended as set forth below:
PART 24—CUSTOMS FINANCIAL AND
ACCOUNTING PROCEDURE
1. The general authority citation for
part 24 continues to read as follows:
■
Authority: 5 U.S.C. 301; 19 U.S.C. 58a–58c,
66, 1202 (General Note 3(i), Harmonized
Tariff Schedule of the United States), 1505,
1520, 1624; 26 U.S.C. 4461, 4462; 31 U.S.C.
3717, 9701; Pub. L. 107–296, 116 Stat. 2135
(6 U.S.C. 1 et seq.).
*
*
§ 24.25
*
*
*
[Amended]
2. In § 24.25, in paragraph (a), eighth
sentence, remove the word ‘‘Customs’’
and add ‘‘CBP’’ in its place.
■
Dated: September 16, 2019.
Alice A. Kipel,
Executive Director, Regulations and Rulings,
Office of Trade.
[FR Doc. 2019–20339 Filed 9–20–19; 8:45 am]
BILLING CODE 9111–14–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9875]
RIN–1545–BO82
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
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AGENCY:
This document contains final
regulations that amend the rules relating
to hardship distributions from section
401(k) plans. The final regulations
reflect statutory changes affecting
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Paperwork Reduction Act
The collection of information
contained in these final regulations has
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545–
1669. The collection of information in
these final regulations is in § 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 reasonably available to
cover expenses resulting from a
hardship and, thus, will need a
distribution from the plan to meet the
expenses. The collection of information
is 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
Hardship Distributions of Elective
Contributions, Qualified Matching
Contributions, Qualified Nonelective
Contributions, and Earnings
SUMMARY:
section 401(k) plans, including changes
made by the Bipartisan Budget Act of
2018. The regulations affect participants
in, beneficiaries of, employers
maintaining, and administrators of
plans that include cash or deferred
arrangements or provide for employee
or matching contributions.
DATES:
Effective Date: These regulations are
effective September 23, 2019.
Applicability Date: For dates of
applicability, see § 1.401(k)–1(d)(3)(v).
FOR FURTHER INFORMATION CONTACT:
Roger Kuehnle at (202) 317–4148 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
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
includes 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
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49651
to a plan or payments directly in cash)
is 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 591⁄2, 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
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).
Existing Regulations Under Section
401(k)
The Department of the Treasury
(Treasury Department) and the IRS
issued comprehensive 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
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21103, providing guidance on
designated Roth contributions under
section 402A; and TD 9447, 74 FR 8200,
providing guidance on section
401(k)(13)). Although the regulations
have not been updated to reflect other
statutory changes, they have been
amended to address certain discrete
issues unrelated to statutory changes
(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
(including assets of the employee’s
spouse and minor children that are
reasonably available to the employee).
Under § 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 § 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,
§ 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
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(determined without regard to whether
the loss exceeds 10% of adjusted gross
income).’’
In addition, § 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
§ 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 § 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, § 1.403(b)–6(c) applies to
distributions from custodial accounts
that are not attributable to section 403(b)
elective deferrals, and § 1.403(b)–6(d)
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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 § 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 § 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 modified 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 (1)
contributions to a profit-sharing or stock
bonus plan to which section 402(e)(3)
applies, (2) QNECs, (3) QMACs, and (4)
earnings on these contributions. Section
41114 of BBA 2018 also added 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 2007–7, 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, made
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during the period that a reservist has
been called to active duty, are referred
to as ‘‘qualified reservist distributions,’’
and could include distributions
attributable to elective contributions.
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
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.
On November 14, 2018, the Treasury
Department and the IRS published
proposed regulations (REG–107813–18)
under section 401(k) and (m) in the
Federal Register (83 FR 56763). No
public hearing was requested or held.
Seven comments on the proposed
regulations were received during the
comment period. After consideration of
the comments, the proposed regulations
are adopted as revised by this Treasury
decision.
Summary of Comments and
Explanation of Provisions
Overview
The final 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. The final regulations are
substantially similar to the proposed
regulations, and plans that complied
with the proposed regulations will
satisfy the final regulations.
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Deemed Immediate and Heavy
Financial Need
The final regulations, like the
proposed regulations, modify the safe
harbor list of expenses in existing
§ 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
1 While section 827(b)(2) and (3) of PPA ’06
amended section 403(b)(7)(A)(ii) and (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.
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individual for whom qualifying
medical, educational, and funeral
expenses may be incurred; (2)
modifying the expense listed in existing
§ 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 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.
Several commenters observed that
this new safe harbor expense, which is
described in the preamble to the
proposed regulations as similar to relief
provided by the IRS after certain major
federally declared disasters, is narrower
in certain respects than this past IRS
relief and asked for confirmation that
the narrowing is intentional. Some
commenters also raised the concern that
the new safe harbor expense would lead
the IRS to discontinue its practice of
issuing announcements providing such
relief. The effect of the new safe harbor
expense differs from the disaster-relief
announcements in three main respects.
First, only disaster-related expenses
and losses of an employee who lived or
worked in the disaster area will qualify
for the new safe harbor expense, and
not, as under the disaster-relief
announcements, expenses and losses of
the employee’s relatives and
dependents. The Treasury Department
and IRS have concluded that limiting
distributions only to those employees
directly affected by a disaster is
consistent with the purposes underlying
the Code’s hardship distribution
provisions and better aligns with the
relief given to affected individuals
under section 7508A for similar
disasters.
Second, unlike under the disasterrelief announcements, there is no
specific deadline by which a request for
a disaster-related hardship distribution
must be made and no specific authority
to relax certain procedural requirements
established by the plan administrator or
plan terms (although it is expected that
plan administrators will be flexible in
interpreting plan terms requiring
documentation relating to the hardship
when processing hardship distribution
requests during the difficult
circumstances following a disaster).
Third, unlike under the disaster-relief
announcements, there is no extended
deadline for plan sponsors to add
disaster-related distribution or loan
provisions to the plan. In the absence of
such an extended deadline, a plan
sponsor that does not choose to add
disaster-related hardship distribution
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49653
provisions as part of an amendment
reflecting the final regulations but
instead chooses to wait until a disaster
occurs to add those provisions (or to
add a loan provision) would need to
adopt a plan amendment by the end of
the plan year the amendment is first
effective.
Making expenses related to certain
disasters a safe harbor expense is
intended to eliminate any delay or
uncertainty concerning access to plan
funds that might otherwise occur
following a major disaster. Accordingly,
the Treasury Department and IRS expect
that no more disaster-relief
announcements will be needed.
However, the Treasury Department and
IRS are considering separate guidance to
address delayed amendment deadlines
when the new safe harbor expense or
loan provisions are added to a plan at
a later date in response to a particular
disaster.
Distribution Necessary To Satisfy
Financial Need
Pursuant to sections 41113 and 41114
of BBA 2018, the final regulations, like
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
final regulations, like the proposed
regulations, eliminate the safe harbor in
existing § 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 before
the hardship distribution is made.
The proposed regulations eliminate
the rules in existing § 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, non-hardship
distributions under the employer’s
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plans, and the employee must provide
a representation that he or she has
insufficient cash or other liquid assets
available to satisfy the financial need. A
hardship distribution may not be made
if the plan administrator has actual
knowledge that is contrary to the
representation. These modifications are
adopted in the final regulations with the
changes described later in this preamble
relating to employee representations
and the type of plans subject to the
prohibition on suspensions.
Two commenters asked that ESOP
dividends under section 404(k) be
excepted from the requirement that an
employee must first obtain other
currently available distributions under
the employer’s plans. Alternatively,
they asked that plans be permitted to
disregard that distribution requirement
with respect to those dividends if the
dividends are less than a specified
dollar amount. The comments appear to
reflect a misinterpretation of the breadth
of the distribution requirement. Under
both the existing regulations and the
proposed regulations, the distribution
requirement applies only to
distributions that are ‘‘currently
available,’’ which significantly limits
the ESOP dividends subject to the rule.
Specifically, the only ESOP dividends
that must be distributed under this rule
are those that, at the time of the
employee’s hardship withdrawal
request, both (1) have been paid to the
plan and (2) are available for the
employee to elect to receive in cash.
Thus, for example, if an ESOP requires
a participant to make an irrevocable
election whether to receive a dividend
by a deadline that is in advance of the
dividend payment date, then a
participant who does not elect to receive
the dividend by that deadline and who
later requests a hardship distribution
has no dividends currently available.
Although in some instances these ESOP
dividend amounts may be small and, if
distributed, would have a minimal
impact on alleviating a hardship, the
Treasury Department and IRS have
concluded that ESOP dividends should
not be treated differently than any other
nonhardship distributions that are
currently available under the plan.
Accordingly, no changes were made in
response to these comments.
One commenter was concerned that
the requirement for an employee to
make a representation regarding the
unavailability of cash or other liquid
assets to satisfy the financial need
would be a problem if the employee has
those assets but has another immediate
need for them. In response to the
comment, the final regulations provide
that the employee representation only
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relates to whether the employee has
cash or other liquid assets that are
‘‘reasonably available’’ to satisfy the
need. Thus, an employee could make a
representation that he or she has
insufficient cash or other liquid assets
reasonably available to satisfy a
financial need even if the employee did
have cash or other liquid assets on
hand, provided those assets were
earmarked for payment of an obligation
in the near future (for example, rent).
The proposed regulations provide that
the employee representation may be
made ‘‘in writing, by an electronic
medium, or in such other form as may
be prescribed by the Commissioner.’’
One commenter asked for clarification
that a verbal representation via
telephone could be used if it is
recorded. The final regulations clarify
that this method is acceptable, by
referencing the definition of ‘‘electronic
medium’’ at § 1.401(a)–21(e)(3).
Two commenters asked for
clarification of the requirement that a
plan administrator not have ‘‘actual
knowledge’’ that is contrary to an
employee’s representation or,
alternatively, they asked that the
requirement be eliminated. The
requirement does not impose upon plan
administrators an obligation to inquire
into the financial condition of
employees who seek hardship
distributions. Rather, the rule is limited
to situations in which the plan
administrator already possesses
sufficiently accurate information to
determine the veracity of an employee
representation. The Treasury
Department and IRS believe the
requirement helps ensure the integrity
of the procedures used to determine
whether a distribution is necessary to
satisfy an employee’s financial need.
Accordingly, the final regulations retain
the actual-knowledge requirement.
The final regulations, like the
proposed regulations, provide 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, 2019), to demonstrate that a
distribution is necessary to satisfy an
immediate and heavy financial need of
an employee. However, like the
proposed regulations, the final
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. This is responsive to
Congress’ concern in enacting section
41113 of BBA 2018 that a suspension
impedes an employee’s ability to
replace distributed funds. See the Ways
and Means Committee description of
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section 1503 of H.R. 1,2 which became
section 41113 of BBA 2018.
One commenter asked what
conditions, besides those listed in
existing § 1.401(k)–1(d)(3)(iv)(B) and (C)
(other than a suspension of
contributions), could be imposed on a
hardship distribution, suggesting that
completing a plan’s application process
and providing required documentation
should be permissible conditions. The
Treasury Department and IRS agree that
these two conditions are permissible.
The Treasury Department and IRS also
note that plan sponsors have available a
broad range of conditions that may be
imposed on a hardship distribution; for
example, a plan could provide for a
nondiscriminatory, minimum dollar
amount for a hardship distribution.
Another commenter recommended
that the prohibition on suspensions of
elective contributions and employee
contributions in the proposed
regulations be eliminated and plan
sponsors be given the flexibility to
impose a suspension. However, in light
of Congress’ expressed concern that a
suspension impedes an employee’s
ability to replace distributed funds, the
final regulations retain the prohibition
on suspensions.
Another commenter requested
guidance on which other plans of the
employer, besides the plan making the
hardship distribution, are subject to the
prohibition on suspensions. Although
the existing safe harbor in § 1.401(k)–
1(d)(3)(iv)(E)(2) imposes a mandatory
suspension with respect to all qualified
and nonqualified plans maintained by
the employer, the proposed regulations
do not specify the plans to which the
prohibition on suspensions applies. The
Treasury Department and IRS have
concluded that Congress’ concerns
underlying section 41113 of BBA 2018
have little relevance to unfunded
nonqualified plans. Accordingly, the
final regulations provide that the
prohibition on suspensions applies only
to a qualified plan, a section 403(b)
plan, and an eligible deferred
compensation plan described in section
457(b) maintained by an eligible
employer described in section
457(e)(1)(A). Thus, a plan subject to
section 409A may retain its suspension
provisions (or, to the extent consistent
with section 409A and the regulations
thereunder, the plan may be amended to
remove them).
Another commenter requested
guidance on the continuing
applicability of revenue rulings that
require a ‘‘substantial limitation’’ on the
right of a participant to withdraw
2 H.R.
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matched employee contributions, such
as a suspension of contributions. See,
for example, Rev. Rul. 74–56, 1974–1
C.B. 90. Under the final regulations, if,
on or after January 1, 2020, matched
employee contributions are distributed
in conjunction with a hardship
distribution of elective contributions, a
suspension of employee contributions is
not permitted.3
Expanded Sources for Hardship
Distributions
Pursuant to section 41114 of BBA
2018, the final regulations, like the
proposed regulations, modify existing
§ 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.
Several commenters asked how the
new distribution rules apply to safe
harbor contributions made to a plan
described in section 401(k)(12). Because
safe harbor contributions made to a plan
described in section 401(k)(12) are
either QNECs or QMACs, amounts
attributable to these contributions may
be distributed on account of hardship.
As noted in the preamble to the
proposed regulations, 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 § 1.401(k)–3(k)(3)(i).
However, a plan may limit the type of
contributions available for hardship
distributions and may exclude earnings
on those contributions from hardship
distribution eligibility.
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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 § 1.401(k)–
1(d)(3); accordingly, the preamble to the
proposed regulations states that the new
rules relating to a hardship distribution
of elective contributions from a section
401(k) plan generally apply to section
403(b) plans. Two commenters asked
whether, in light of historical concerns
about employee self-certification in
section 403(b) plans, the employeerepresentation requirement applies to
section 403(b) plans. Because this
requirement is retained in the final
3 Issues relating to the applicability of prior
revenue rulings to distributions of matched
employee contributions not made in conjunction
with a hardship distribution of elective
contributions are beyond the scope of these
regulations.
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regulations, at § 1.401(k)–1(d)(3)(iii)(B),
it applies to section 403(b) plans.
The preamble to the proposed
regulations addresses other issues
related to hardship distributions under
section 403(b) plans, and states that
because Code section 403(b)(11) was not
amended by section 41114 of BBA 2018,
income attributable to section 403(b)
elective deferrals continues to be
ineligible for distribution on account of
hardship. As also stated in that
preamble, 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
§ 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.
Applicability Dates
The changes to the hardship
distribution rules made by BBA 2018
are effective for plan years beginning
after December 31, 2018. The final
regulations provide plan sponsors with
a number of applicability-date options.
Although presented differently in the
proposed regulations, the options
available to plan sponsors under the
final regulations are the same as those
available under the proposed
regulations.
In response to a comment on the
proposed regulations requesting clarity
regarding which rules apply during
2019, the final regulations provide that
§ 1.401(k)–1(d)(3) applies to
distributions made on or after January 1,
2020 (rather than, as in the proposed
regulations, to distributions made in
plan years beginning after December 31,
2018). However, § 1.401(k)–1(d)(3) may
be applied to distributions made in plan
years beginning after December 31,
2018, and 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 pre2019 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
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49655
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).
If the choice is made to apply
§ 1.401(k)–1(d)(3) to distributions made
before January 1, 2020, the new rules
requiring an employee representation
and prohibiting a suspension of
contributions may be disregarded with
respect to those distributions. To the
extent early application of § 1.401(k)–
1(d)(3) is not chosen, the rules in
§ 1.401(k)–1(d)(3), prior to amendment
by this Treasury decision, apply to
distributions made before January 1,
2020, taking into account statutory
changes effective before 2020 that are
not reflected in that regulation.
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 occurred in 2018, 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 the Federal
Emergency Management Agency for
individual assistance with respect to the
disaster.
Plan Amendments
The Treasury Department and IRS
expect that plan sponsors will need to
amend their plans’ hardship
distribution provisions to reflect the
final regulations, and any such
amendment must be effective for
distributions beginning no later than
January 1, 2020. 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 (RAL) described in
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section 9 of Rev. Proc. 2016–37 that
includes the change; if the final
regulations are included in the 2019
RAL, the deadline will be December 31,
2021.
A plan provision that does not result
in the failure of the plan to satisfy the
qualification requirements, but is
integrally related to a qualification
requirement that has been changed in a
manner that requires the plan to be
amended, may be amended by the same
deadline that applies to the required
amendment. The Treasury Department
and IRS have determined that a plan
amendment modifying a plan’s hardship
distribution provisions that is effective
no later than the required amendment,
including a plan amendment reflecting
one or more of the following, will be
treated as amending a provision that is
integrally related to a qualification
requirement that has been changed: (1)
The change to section 165 (relating to
casualty losses); (2) the addition of the
new safe harbor expense (relating to
expenses incurred as a result of certain
federally declared disasters); and (3) the
extension of the relief under
Announcement 2017–15, 2017–47 I.R.B.
534, to victims of Hurricanes Florence
and Michael that was provided in the
preamble to the proposed regulations.
Thus, in the case of an individually
designed plan, the deadline for such an
integrally related amendment will be
the same as the deadline for the
required amendment (described in the
preceding paragraph), even if some of
the amendment provisions have an
earlier effective date.
Several commenters requested
guidance on amendment deadlines for
pre-approved plans. The deadline for
adopting a required amendment (as well
as any integrally related amendment) to
a pre-approved plan is set forth in
section 15 of Rev. Proc. 2016–37, and
varies depending on several factors,
including the type of entity sponsoring
the plan and the period used for the
plan year. For example, under Rev.
Proc. 2016–37, in the case of an
employer with a calendar-year tax year
that maintains a pre-approved plan with
a calendar-year plan year and that chose
to apply the new safe harbor expense for
certain disasters in 2018, the deadline to
adopt such an interim amendment for
the new expense would be the tax-filing
deadline (plus extensions) for 2018. The
Treasury Department and IRS recognize
that, for an employer using a preapproved plan, the interim amendment
deadline under Rev. Proc. 2016–37 that
applies for an amendment to a plan
provision that is integral to the
qualification requirement that has been
changed may be earlier than the interim
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amendment deadline for the required
amendment. Accordingly, the Treasury
Department and IRS are extending the
deadline for an interim amendment
related to the hardship distribution
provisions. Under this extension, for an
employer using a pre-approved plan, the
interim amendment deadline for the
required amendment to the hardship
distribution provisions of the plan will
also be the deadline for all amendments
integrally related to the hardship
distribution provisions (rather than the
earlier deadline that might otherwise
apply under Rev. Proc. 2016–37 to those
integrally related amendments). Thus, if
the employer in the example in this
paragraph were to implement the
prohibition on suspensions effective for
distributions made on or after January 1,
2020, the interim amendment deadline
to add the new safe harbor expense
would be the same as the deadline for
the required amendment (that is, the
tax-filing deadline (plus extensions) for
2020), even if the new safe harbor
expense is effective in an earlier year.
Several commenters also requested
guidance on the amendment deadlines
for pre-approved and individually
designed section 403(b) plans. Under
Rev. Proc. 2017–18, 2017–5 I.R.B. 743,
the remedial amendment deadline for a
section 403(b) plan is March 31, 2020.
The Treasury Department and IRS are
considering providing for a later
amendment deadline for the
amendments relating to the final
regulations in separate guidance.
Other Issues
Several commenters requested that
the Internal Revenue Manual (IRM) be
updated to reflect the new hardship
distribution rules. The IRS intends to
update the IRM to reflect the new rules
in the final regulations after publication
of the final regulations.
Two commenters asked whether a
plan must include every one of the
seven expenses in the § 1.401(k)–
1(d)(3)(ii)(B) list of deemed immediate
and heavy financial needs and cover
every individual described in the list
(for example, a primary beneficiary
under the plan, in the case of certain
expenses) in order to be considered as
using the safe harbor standards for
hardship distributions. Under the IRS’s
pre-approved plan program for qualified
plans, certain section 401(k) plans that
provide for hardship distributions will
not be approved unless the distributions
are made under circumstances
described in the safe harbor standards in
the regulations under section 401(k). For
this purpose, a plan making hardship
distributions for some but not all the
safe harbor expenses, or for expenses of
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some but not all the categories of
individuals described in § 1.401(k)–
1(d)(3)(ii)(B), is considered to be using
the safe harbor standards for hardship
distributions.
One commenter asked whether the
proposed regulations’ prohibition on
suspensions of elective contributions
and employee contributions applies to
pre-approved section 403(b) plans in
light of the fact that the IRS’s rules for
pre-approved section 403(b) plans
require that a participant’s elective
deferrals be suspended for 6 months
following a hardship distribution. The
prohibition on suspensions is retained
in the final regulations, and the rule
applies to section 403(b) plans,
including pre-approved section 403(b)
plans.
Also, one commenter asked for relief
relating to the notice requirements for
safe harbor plans described in sections
401(k)(12) and 401(k)(13). Because a
description of withdrawal provisions is
required to be included in the notice
provided to eligible employees (see
§ 1.401(k)–3(d)(2)(ii)(G)), if a description
of the new hardship withdrawal
provisions was not already included in
a notice, employees must be provided
an updated notice reflecting the new
hardship withdrawal provisions and
must be given a reasonable opportunity
to change their cash or deferred
election. See section III.C of Notice
2016–16, 2016–7 I.R.B. 318, for the
notice-timing and election-opportunity
requirements with respect to mid-year
amendments to safe harbor plans.
Special Analyses
These regulations are not subject to
review under section 6(b) of Executive
Order 12866 pursuant to the
Memorandum of Agreement (April 11,
2018) between the Treasury Department
and the Office of Management and
Budget regarding review of tax
regulations.
Pursuant to the Regulatory Flexibility
Act (5 U.S.C. chapter 6), it is hereby
certified that the collection of
information in these regulations will not
have a significant economic impact on
a substantial number of small entities.
This certification is based on the fact
that employers with section 401(k)
plans that permit hardship withdrawals
must already maintain records relating
to an employee’s application for a
hardship withdrawal, and the
incremental cost due to the new
certification requirement in final
regulations § 1.401(k)–1(d)(3)(iii)(B)(2)
will be minimal. In addition, some
employers, including some small
entities, use a hardship withdrawal
procedure available under the existing
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Federal Register / Vol. 84, No. 184 / Monday, September 23, 2019 / Rules and Regulations
regulations that requires an employee
certification almost identical to that in
the final regulations. Therefore, a
regulatory flexibility analysis under the
Regulatory Flexibility Act is not
required. Pursuant to section 7805(f) of
the Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small businesses, and no
comment was received.
Drafting Information
The principal author of these
regulations is Roger Kuehnle of the
Office of Associate Chief Counsel
(Employee Benefits, Exempt
Organizations, and Employment Taxes).
However, other personnel from the IRS
and Treasury Department participated
in their development.
Statement of Availability of IRS
Documents
The IRS notices, revenue procedures
and other guidance cited in this
preamble are published in the Internal
Revenue Bulletin (or Cumulative
Bulletin) and are available from the
Superintendent of Documents, U.S.
Government Publishing Office,
Washington, DC 20402, or by visiting
the IRS website at https://www.irs.gov.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
■
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*
*
Table of contents.
*
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*
*
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*
*
*
*
(d) * * *
(3) * * *
(ii) Immediate and heavy financial need.
(A) In general.
(B) Deemed immediate and heavy financial
need.
(C) Primary beneficiary under the plan.
(iii) Distribution necessary to satisfy
financial need.
(A) Distribution may not exceed amount of
need.
(B) No alternative means reasonably
available.
(C) Additional conditions.
(iv) Commissioner may expand standards.
(v) Applicability date.
(A) General rule.
(B) Options for earlier application.
(C) Certain rules optional in 2019.
*
*
*
*
*
Par. 3. Section 1.401(k)–1 is amended
by:
■ 1. Revising paragraphs (d)(1)(ii) and
(iii) and adding new paragraph
(d)(1)(iv).
■ 2. Removing paragraph (d)(3)(ii) and
redesignating paragraphs (d)(3)(iii), (iv),
and (v) as paragraphs (d)(3)(ii), (iii), and
(iv).
■ 3. Revising newly redesignated
paragraph (d)(3)(ii)(B) and adding new
paragraph (d)(3)(ii)(C).
■ 4. Revising newly redesignated
paragraphs (d)(3)(iii) and (iv) and
adding new paragraph (d)(3)(v).
■ 5. In paragraph (d)(6), removing
Examples 3, 4, and 5, redesignating
Example 6 as Example 3, and
designating Examples 1 through 3 as
paragraphs (d)(6)(i) through (iii).
■ 6. In newly designated paragraph
(d)(6)(ii), redesignating paragraphs
(d)(6)(ii)(i) and (ii) as paragraphs
(d)(6)(ii)(A) and (B).
The additions and revisions read as
follows:
■
*
*
*
*
*
■ Par. 2. Section 1.401(k)–0 is amended
under the heading § 1.401(k)–1 by
revising the entries for (d)(3)(ii) and
(d)(3)(ii)(A) and (B), adding an entry for
(d)(3)(ii)(C), revising the entries for
(d)(3)(iii) and (d)(3)(iii)(A) and (B),
adding an entry for (d)(3)(iii)(C),
revising the entry for (d)(3)(iv),
removing the entries for (d)(3)(iv)(A)
through (F), revising the entry for
(d)(3)(v), and adding the entries for
(d)(3)(v)(A) through (C) to read as
follows:
§ 1.401(k)–0
*
§ 1.401(k)–1 Certain cash or deferred
arrangements.
Authority: 26 U.S.C. 401(m)(9) and 26
U.S.C. 7805.
*
§ 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
591⁄2; 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) * * *
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49657
(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
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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 each of the following
requirements is satisfied—
(1) 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;
(2) The employee has provided to the
plan administrator a representation in
writing (including by using an
electronic medium as defined in
§ 1.401(a)–21(e)(3)), or in such other
form as may be prescribed by the
Commissioner, that he or she has
insufficient cash or other liquid assets
reasonably available to satisfy the need;
and
(3) The plan administrator does not
have actual knowledge that is contrary
to the representation.
(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, 2019), 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, a plan may not
provide for a suspension of an
employee’s elective contributions or
employee contributions under any plan
described in section 401(a) or 403(a),
any section 403(b) plan, or any eligible
governmental plan described in § 1.457–
2(f) as a condition of obtaining a
hardship distribution.
(iv) Commissioner may expand
standards. The Commissioner may
prescribe additional guidance of general
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applicability, published in the Internal
Revenue Bulletin (see § 601.601(d)(2) of
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) Applicability date—(A) General
rule. Except as otherwise provided in
this paragraph (d)(3)(v), the rules in this
paragraph (d)(3) apply to distributions
made on or after January 1, 2020. For
distributions made before January 1,
2020, the rules in 26 CFR 1.401(k)–
1(d)(3) (revised as of April 1, 2019)
apply.
(B) Options for earlier application.
The rules in this paragraph (d)(3) may
be applied to distributions made in plan
years beginning after December 31,
2018, and 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, 2019) 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
(listing distributions deemed to be made
on account of an immediate and heavy
financial need) may be applied to
distributions made on or after a date
that is as early as January 1, 2018.
(C) Certain rules optional in 2019. If,
in accordance with paragraph
(d)(3)(v)(B) of this section, the rules in
this paragraph (d)(3) are applied to
distributions made before January 1,
2020, then the rules in paragraphs
(d)(3)(iii)(B)(2) and (3) of this section
(relating to an employee representation)
and 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 disregarded with
respect to such distributions.
*
*
*
*
*
Par. 4. Section 1.401(k)–3 is amended
by:
■ 1. Revising paragraph (c)(6)(v).
■
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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 § 1.401(k)–
1(d)(3)(iv)(E)’’ in the fifth sentence in
paragraph (c)(7), Example 1(i).
■ 3. Removing the second sentence in
paragraph (j)(2)(iv).
The revision reads as follows:
■
§ 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.
*
*
*
*
*
§ 1.401(k)–6
[Amended]
Par. 5. Section 1.401(k)–6 is amended
by:
■ 1. Removing the fourth sentence in
paragraph (2) of the definition of
Eligible employee.
■ 2. Removing the language ‘‘, except as
provided otherwise in § 1.401(k)–1(c)
and (d),’’ in the definitions of Qualified
matching contributions (QMACs) and
Qualified nonelective contributions
(QNECs).
■
Par. 6. Section 1.401(m)–3 is amended
by revising paragraph (d)(6)(v) to read as
follows:
■
§ 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
E:\FR\FM\23SER1.SGM
23SER1
Federal Register / Vol. 84, No. 184 / Monday, September 23, 2019 / Rules and Regulations
contributions has been suspended for 6
months.
*
*
*
*
*
Kirsten Wielobob,
Deputy Commissioner for Services and
Enforcement.
Approved: September 5, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2019–20511 Filed 9–19–19; 4:15 pm]
BILLING CODE 4830–01–P
ENVIRONMENTAL PROTECTION
AGENCY
40 CFR Part 52
[EPA–R05–OAR–2015–0700; FRL–9999–77–
Region 5]
Air Plan Approval; Indiana; Attainment
Plan for the Morgan County Sulfur
Dioxide Nonattainment Area
Environmental Protection
Agency (EPA).
ACTION: Final rule.
AGENCY:
The Environmental Protection
Agency (EPA) is approving as a State
Implementation Plan (SIP) revision the
Morgan County-related elements of an
Indiana submission to EPA dated
October 2, 2015, as supplemented on
November 15, 2017, June 7, 2017,
February 8, 2019, and February 12,
2019. EPA concludes that Indiana has
appropriately demonstrated that the
plan provisions provide for attainment
of the 2010 sulfur dioxide (SO2)
National Ambient Air Quality Standard
(NAAQS) in the Morgan County area by
the applicable attainment date and that
the plan meets the other applicable
requirements under the Clean Air Act.
DATES: This final rule is effective on
October 23, 2019.
ADDRESSES: EPA has established a
docket for this action under Docket ID
No. EPA–R05–OAR–2015–0700. All
documents in the docket are listed on
the www.regulations.gov website.
Although listed in the index, some
information is not publicly available,
i.e., Confidential Business Information
(CBI) or other information whose
disclosure is restricted by statute.
Certain other material, such as
copyrighted material, is not placed on
the internet and will be publicly
available only in hard copy form.
Publicly available docket materials are
available through www.regulations.gov,
or please contact the person identified
in the FOR FURTHER INFORMATION
CONTACT section for additional
availability information.
jbell on DSK3GLQ082PROD with RULES
SUMMARY:
VerDate Sep<11>2014
16:27 Sep 20, 2019
Jkt 247001
John
Summerhays at EPA Region 5,
Attainment Planning and Maintenance
Section, Air Programs Branch (AR–18J),
Environmental Protection Agency,
Region 5, 77 West Jackson Boulevard,
Chicago, Illinois 60604, (312) 886–6067,
summerhays.john@epa.gov.
SUPPLEMENTARY INFORMATION:
FOR FURTHER INFORMATION CONTACT:
I. Summary of EPA’s Notice of
Proposed Rulemaking
Following the promulgation in 2010
of a 1-hour primary SO2 NAAQS, EPA
designated two townships in Morgan
County, Indiana as nonattainment for
this NAAQS, in conjunction with
designating three other areas in Indiana
and multiple areas in other states as
nonattainment as well. On October 2,
2015, Indiana submitted plans
addressing all four of its SO2
nonattainment areas. EPA is taking
separate action on Indiana’s plans for its
other nonattainment areas: EPA
proposed action on plans for the other
three areas (Indianapolis, Terre Haute
and Southwest Indiana) on August 15,
2018, at 83 FR 40487, and took final
action on the plans for Indianapolis and
Terre Haute on March 22, 2019, at 84 FR
10692. EPA continues separate review
of the plan for Southwest Indiana.
In addition to its October 2, 2015
submittal, Indiana made four
supplemental submittals, three of which
are relevant specifically to Morgan
County. While the October 2, 2015
submittal included rules that imposed
work practice requirements on both the
Indianapolis Power and Light-Eagle
Valley power plant (IP&L-Eagle Valley)
and Hydraulic Press Brick, Indiana
rescinded the submittal of the
requirements for Hydraulic Press Brick
on June 7, 2017. However, Indiana then
withdrew this rescission on February
12, 2019, reactivating its request for EPA
to approve these requirements. On
February 8, 2019, Indiana submitted
additional analysis for Morgan County
to demonstrate that use of a more
conservative approach to estimating
background concentrations in this area
also resulted in the conclusion that the
area is attaining the SO2 NAAQS. In
addition, on November 15, 2017,
Indiana provided clarifications on its
inventory procedures and other
elements of its four nonattainment
plans.
EPA published a notice of proposed
rulemaking addressing Indiana’s plan
for the Morgan County SO2
nonattainment area on July 9, 2019, at
84 FR 32672. EPA proposed to approve
rules that require IP&L-Eagle Valley to
burn natural gas (rather than coal) in its
primary boilers and that require
PO 00000
Frm 00025
Fmt 4700
Sfmt 4700
49659
Hydraulic Press Brick to conduct dry
sorbent injection sufficient to achieve 50
percent emission reduction (except to
the extent that this control is not
necessary for SO2 emissions to be below
2.5 pounds per million British Thermal
Units). EPA proposed to conclude that
Indiana has demonstrated that these
requirements provide for the Morgan
County area to attain the SO2 NAAQS.
Finally, EPA proposed to conclude that
Indiana has satisfied the other
applicable requirements for
nonattainment areas, including
requirements for a suitable emissions
inventory, for reasonably available
control measures/reasonably available
control technology (RACM/RACT), for
reasonable further progress (RFP), and
for contingency measures.
II. Comments
EPA received no comments on its
notice of proposed rulemaking. EPA
also has no other reason to reevaluate its
proposed approval of Indiana’s plan for
the Morgan County SO2 nonattainment
area.
III. EPA’s Final Action
EPA is approving Indiana’s SIP
submission for the Morgan County SO2
nonattainment area, which the state
submitted to EPA on October 2, 2015
and supplemented on June 7, 2017,
November 15, 2017, February 8, 2019,
and February 12, 2019. This SO2
nonattainment plan included Indiana’s
attainment demonstration for this area.
The nonattainment plan also addressed
requirements for emission inventories,
RACT/RACM, RFP, and contingency
measures. Indiana has previously
addressed requirements regarding
nonattainment area new source review
(NSR). EPA has determined that
Indiana’s SO2 nonattainment plan for
Morgan County meets the applicable
requirements of Clean Air Act sections
110, 172, 191, and 192.
The rules that underpin Indiana’s
attainment plan for Morgan County
include three rules. Indiana
Administrative Code, Title 326, Rule 7–
4–11.1 (326 IAC 7–4–11.1, entitled
‘‘Morgan County sulfur dioxide
emission limitations’’) imposes the work
practice requirements described above.
Indiana’s SO2 nonattainment plans also
include two rules specifying compliance
provisions, namely Rule 326 IAC 7–1.1–
3 (entitled ‘‘Compliance date’’) and Rule
326 IAC 7–2–1 (entitled ‘‘Reporting
requirements; methods to determine
compliance’’). However, EPA has
already approved these two compliance
rules, as part of final action to approve
Indiana’s plan for the Indianapolis and
Terre Haute areas. Therefore, while EPA
E:\FR\FM\23SER1.SGM
23SER1
Agencies
[Federal Register Volume 84, Number 184 (Monday, September 23, 2019)]
[Rules and Regulations]
[Pages 49651-49659]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20511]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9875]
RIN-1545-BO82
Hardship Distributions of Elective Contributions, Qualified
Matching Contributions, Qualified Nonelective Contributions, and
Earnings
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations that amend the rules
relating to hardship distributions from section 401(k) plans. The final
regulations reflect statutory changes affecting section 401(k) plans,
including changes made by the Bipartisan Budget Act of 2018. The
regulations affect participants in, beneficiaries of, employers
maintaining, and administrators of plans that include cash or deferred
arrangements or provide for employee or matching contributions.
DATES:
Effective Date: These regulations are effective September 23, 2019.
Applicability Date: For dates of applicability, see Sec. 1.401(k)-
1(d)(3)(v).
FOR FURTHER INFORMATION CONTACT: Roger Kuehnle at (202) 317-4148 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545-1669. The collection of information
in these final regulations 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 reasonably available to cover expenses resulting from a
hardship and, thus, will need a distribution from the plan to meet the
expenses. The collection of information is 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 includes 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) is 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 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).
Existing Regulations Under Section 401(k)
The Department of the Treasury (Treasury Department) and the IRS
issued comprehensive 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
[[Page 49652]]
21103, providing guidance on designated Roth contributions under
section 402A; and TD 9447, 74 FR 8200, providing guidance on section
401(k)(13)). Although the regulations have not been updated to reflect
other statutory changes, they have been amended to address certain
discrete issues unrelated to statutory changes (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 (including
assets of the employee's spouse and minor children 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 modified 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 (1) contributions to
a profit-sharing or stock bonus plan to which section 402(e)(3)
applies, (2) QNECs, (3) QMACs, and (4) earnings on these contributions.
Section 41114 of BBA 2018 also added 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 2007-7, 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, made
[[Page 49653]]
during the period that a reservist has been called to active duty, are
referred to as ``qualified reservist distributions,'' and could include
distributions attributable to elective contributions. 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 section
403(b)(7)(A)(ii) and (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.
On November 14, 2018, the Treasury Department and the IRS published
proposed regulations (REG-107813-18) under section 401(k) and (m) in
the Federal Register (83 FR 56763). No public hearing was requested or
held. Seven comments on the proposed regulations were received during
the comment period. After consideration of the comments, the proposed
regulations are adopted as revised by this Treasury decision.
Summary of Comments and Explanation of Provisions
Overview
The final 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. The final regulations are
substantially similar to the proposed regulations, and plans that
complied with the proposed regulations will satisfy the final
regulations.
Deemed Immediate and Heavy Financial Need
The final regulations, like the proposed regulations, modify the
safe harbor list of expenses in existing 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 existing 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
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.
Several commenters observed that this new safe harbor expense,
which is described in the preamble to the proposed regulations as
similar to relief provided by the IRS after certain major federally
declared disasters, is narrower in certain respects than this past IRS
relief and asked for confirmation that the narrowing is intentional.
Some commenters also raised the concern that the new safe harbor
expense would lead the IRS to discontinue its practice of issuing
announcements providing such relief. The effect of the new safe harbor
expense differs from the disaster-relief announcements in three main
respects.
First, only disaster-related expenses and losses of an employee who
lived or worked in the disaster area will qualify for the new safe
harbor expense, and not, as under the disaster-relief announcements,
expenses and losses of the employee's relatives and dependents. The
Treasury Department and IRS have concluded that limiting distributions
only to those employees directly affected by a disaster is consistent
with the purposes underlying the Code's hardship distribution
provisions and better aligns with the relief given to affected
individuals under section 7508A for similar disasters.
Second, unlike under the disaster-relief announcements, there is no
specific deadline by which a request for a disaster-related hardship
distribution must be made and no specific authority to relax certain
procedural requirements established by the plan administrator or plan
terms (although it is expected that plan administrators will be
flexible in interpreting plan terms requiring documentation relating to
the hardship when processing hardship distribution requests during the
difficult circumstances following a disaster).
Third, unlike under the disaster-relief announcements, there is no
extended deadline for plan sponsors to add disaster-related
distribution or loan provisions to the plan. In the absence of such an
extended deadline, a plan sponsor that does not choose to add disaster-
related hardship distribution provisions as part of an amendment
reflecting the final regulations but instead chooses to wait until a
disaster occurs to add those provisions (or to add a loan provision)
would need to adopt a plan amendment by the end of the plan year the
amendment is first effective.
Making expenses related to certain disasters a safe harbor expense
is intended to eliminate any delay or uncertainty concerning access to
plan funds that might otherwise occur following a major disaster.
Accordingly, the Treasury Department and IRS expect that no more
disaster-relief announcements will be needed. However, the Treasury
Department and IRS are considering separate guidance to address delayed
amendment deadlines when the new safe harbor expense or loan provisions
are added to a plan at a later date in response to a particular
disaster.
Distribution Necessary To Satisfy Financial Need
Pursuant to sections 41113 and 41114 of BBA 2018, the final
regulations, like 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 final regulations, like the proposed
regulations, eliminate the safe harbor in existing 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
before the hardship distribution is made.
The proposed regulations eliminate the rules in existing 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, non-hardship distributions under the employer's
[[Page 49654]]
plans, and the employee must provide a representation that he or she
has insufficient cash or other liquid assets available to satisfy the
financial need. A hardship distribution may not be made if the plan
administrator has actual knowledge that is contrary to the
representation. These modifications are adopted in the final
regulations with the changes described later in this preamble relating
to employee representations and the type of plans subject to the
prohibition on suspensions.
Two commenters asked that ESOP dividends under section 404(k) be
excepted from the requirement that an employee must first obtain other
currently available distributions under the employer's plans.
Alternatively, they asked that plans be permitted to disregard that
distribution requirement with respect to those dividends if the
dividends are less than a specified dollar amount. The comments appear
to reflect a misinterpretation of the breadth of the distribution
requirement. Under both the existing regulations and the proposed
regulations, the distribution requirement applies only to distributions
that are ``currently available,'' which significantly limits the ESOP
dividends subject to the rule. Specifically, the only ESOP dividends
that must be distributed under this rule are those that, at the time of
the employee's hardship withdrawal request, both (1) have been paid to
the plan and (2) are available for the employee to elect to receive in
cash. Thus, for example, if an ESOP requires a participant to make an
irrevocable election whether to receive a dividend by a deadline that
is in advance of the dividend payment date, then a participant who does
not elect to receive the dividend by that deadline and who later
requests a hardship distribution has no dividends currently available.
Although in some instances these ESOP dividend amounts may be small
and, if distributed, would have a minimal impact on alleviating a
hardship, the Treasury Department and IRS have concluded that ESOP
dividends should not be treated differently than any other nonhardship
distributions that are currently available under the plan. Accordingly,
no changes were made in response to these comments.
One commenter was concerned that the requirement for an employee to
make a representation regarding the unavailability of cash or other
liquid assets to satisfy the financial need would be a problem if the
employee has those assets but has another immediate need for them. In
response to the comment, the final regulations provide that the
employee representation only relates to whether the employee has cash
or other liquid assets that are ``reasonably available'' to satisfy the
need. Thus, an employee could make a representation that he or she has
insufficient cash or other liquid assets reasonably available to
satisfy a financial need even if the employee did have cash or other
liquid assets on hand, provided those assets were earmarked for payment
of an obligation in the near future (for example, rent).
The proposed regulations provide that the employee representation
may be made ``in writing, by an electronic medium, or in such other
form as may be prescribed by the Commissioner.'' One commenter asked
for clarification that a verbal representation via telephone could be
used if it is recorded. The final regulations clarify that this method
is acceptable, by referencing the definition of ``electronic medium''
at Sec. 1.401(a)-21(e)(3).
Two commenters asked for clarification of the requirement that a
plan administrator not have ``actual knowledge'' that is contrary to an
employee's representation or, alternatively, they asked that the
requirement be eliminated. The requirement does not impose upon plan
administrators an obligation to inquire into the financial condition of
employees who seek hardship distributions. Rather, the rule is limited
to situations in which the plan administrator already possesses
sufficiently accurate information to determine the veracity of an
employee representation. The Treasury Department and IRS believe the
requirement helps ensure the integrity of the procedures used to
determine whether a distribution is necessary to satisfy an employee's
financial need. Accordingly, the final regulations retain the actual-
knowledge requirement.
The final regulations, like the proposed regulations, provide 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, 2019), to demonstrate that a distribution is necessary to
satisfy an immediate and heavy financial need of an employee. However,
like the proposed regulations, the final 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. This
is responsive to Congress' concern in enacting section 41113 of BBA
2018 that a suspension impedes an employee's ability to replace
distributed funds. See the Ways and Means Committee description of
section 1503 of H.R. 1,\2\ which became section 41113 of BBA 2018.
---------------------------------------------------------------------------
\2\ H.R. Rep. No. 115-409, at 196 (2017).
---------------------------------------------------------------------------
One commenter asked what conditions, besides those listed in
existing Sec. 1.401(k)-1(d)(3)(iv)(B) and (C) (other than a suspension
of contributions), could be imposed on a hardship distribution,
suggesting that completing a plan's application process and providing
required documentation should be permissible conditions. The Treasury
Department and IRS agree that these two conditions are permissible. The
Treasury Department and IRS also note that plan sponsors have available
a broad range of conditions that may be imposed on a hardship
distribution; for example, a plan could provide for a
nondiscriminatory, minimum dollar amount for a hardship distribution.
Another commenter recommended that the prohibition on suspensions
of elective contributions and employee contributions in the proposed
regulations be eliminated and plan sponsors be given the flexibility to
impose a suspension. However, in light of Congress' expressed concern
that a suspension impedes an employee's ability to replace distributed
funds, the final regulations retain the prohibition on suspensions.
Another commenter requested guidance on which other plans of the
employer, besides the plan making the hardship distribution, are
subject to the prohibition on suspensions. Although the existing safe
harbor in Sec. 1.401(k)-1(d)(3)(iv)(E)(2) imposes a mandatory
suspension with respect to all qualified and nonqualified plans
maintained by the employer, the proposed regulations do not specify the
plans to which the prohibition on suspensions applies. The Treasury
Department and IRS have concluded that Congress' concerns underlying
section 41113 of BBA 2018 have little relevance to unfunded
nonqualified plans. Accordingly, the final regulations provide that the
prohibition on suspensions applies only to a qualified plan, a section
403(b) plan, and an eligible deferred compensation plan described in
section 457(b) maintained by an eligible employer described in section
457(e)(1)(A). Thus, a plan subject to section 409A may retain its
suspension provisions (or, to the extent consistent with section 409A
and the regulations thereunder, the plan may be amended to remove
them).
Another commenter requested guidance on the continuing
applicability of revenue rulings that require a ``substantial
limitation'' on the right of a participant to withdraw
[[Page 49655]]
matched employee contributions, such as a suspension of contributions.
See, for example, Rev. Rul. 74-56, 1974-1 C.B. 90. Under the final
regulations, if, on or after January 1, 2020, matched employee
contributions are distributed in conjunction with a hardship
distribution of elective contributions, a suspension of employee
contributions is not permitted.\3\
---------------------------------------------------------------------------
\3\ Issues relating to the applicability of prior revenue
rulings to distributions of matched employee contributions not made
in conjunction with a hardship distribution of elective
contributions are beyond the scope of these regulations.
---------------------------------------------------------------------------
Expanded Sources for Hardship Distributions
Pursuant to section 41114 of BBA 2018, the final regulations, like
the proposed regulations, modify existing 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.
Several commenters asked how the new distribution rules apply to
safe harbor contributions made to a plan described in section
401(k)(12). Because safe harbor contributions made to a plan described
in section 401(k)(12) are either QNECs or QMACs, amounts attributable
to these contributions may be distributed on account of hardship. As
noted in the preamble to the proposed regulations, 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). However,
a plan may limit the type of contributions available for hardship
distributions and may exclude earnings on those contributions from
hardship distribution eligibility.
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); accordingly, the
preamble to the proposed regulations states that the new rules relating
to a hardship distribution of elective contributions from a section
401(k) plan generally apply to section 403(b) plans. Two commenters
asked whether, in light of historical concerns about employee self-
certification in section 403(b) plans, the employee-representation
requirement applies to section 403(b) plans. Because this requirement
is retained in the final regulations, at Sec. 1.401(k)-
1(d)(3)(iii)(B), it applies to section 403(b) plans.
The preamble to the proposed regulations addresses other issues
related to hardship distributions under section 403(b) plans, and
states that because Code section 403(b)(11) was not amended by section
41114 of BBA 2018, income attributable to section 403(b) elective
deferrals continues to be ineligible for distribution on account of
hardship. As also stated in that preamble, 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.
Applicability Dates
The changes to the hardship distribution rules made by BBA 2018 are
effective for plan years beginning after December 31, 2018. The final
regulations provide plan sponsors with a number of applicability-date
options. Although presented differently in the proposed regulations,
the options available to plan sponsors under the final regulations are
the same as those available under the proposed regulations.
In response to a comment on the proposed regulations requesting
clarity regarding which rules apply during 2019, the final regulations
provide that Sec. 1.401(k)-1(d)(3) applies to distributions made on or
after January 1, 2020 (rather than, as in the proposed regulations, to
distributions made in plan years beginning after December 31, 2018).
However, Sec. 1.401(k)-1(d)(3) may be applied to distributions made in
plan years beginning after December 31, 2018, and 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).
If the choice is made to apply Sec. 1.401(k)-1(d)(3) to
distributions made before January 1, 2020, the new rules requiring an
employee representation and prohibiting a suspension of contributions
may be disregarded with respect to those distributions. To the extent
early application of Sec. 1.401(k)-1(d)(3) is not chosen, the rules in
Sec. 1.401(k)-1(d)(3), prior to amendment by this Treasury decision,
apply to distributions made before January 1, 2020, taking into account
statutory changes effective before 2020 that are not reflected in that
regulation.
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 occurred in 2018, 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 the
Federal Emergency Management Agency for individual assistance with
respect to the disaster.
Plan Amendments
The Treasury Department and IRS expect that plan sponsors will need
to amend their plans' hardship distribution provisions to reflect the
final regulations, and any such amendment must be effective for
distributions beginning no later than January 1, 2020. 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 (RAL) described in
[[Page 49656]]
section 9 of Rev. Proc. 2016-37 that includes the change; if the final
regulations are included in the 2019 RAL, the deadline will be December
31, 2021.
A plan provision that does not result in the failure of the plan to
satisfy the qualification requirements, but is integrally related to a
qualification requirement that has been changed in a manner that
requires the plan to be amended, may be amended by the same deadline
that applies to the required amendment. The Treasury Department and IRS
have determined that a plan amendment modifying a plan's hardship
distribution provisions that is effective no later than the required
amendment, including a plan amendment reflecting one or more of the
following, will be treated as amending a provision that is integrally
related to a qualification requirement that has been changed: (1) The
change to section 165 (relating to casualty losses); (2) the addition
of the new safe harbor expense (relating to expenses incurred as a
result of certain federally declared disasters); and (3) the extension
of the relief under Announcement 2017-15, 2017-47 I.R.B. 534, to
victims of Hurricanes Florence and Michael that was provided in the
preamble to the proposed regulations. Thus, in the case of an
individually designed plan, the deadline for such an integrally related
amendment will be the same as the deadline for the required amendment
(described in the preceding paragraph), even if some of the amendment
provisions have an earlier effective date.
Several commenters requested guidance on amendment deadlines for
pre-approved plans. The deadline for adopting a required amendment (as
well as any integrally related amendment) to a pre-approved plan is set
forth in section 15 of Rev. Proc. 2016-37, and varies depending on
several factors, including the type of entity sponsoring the plan and
the period used for the plan year. For example, under Rev. Proc. 2016-
37, in the case of an employer with a calendar-year tax year that
maintains a pre-approved plan with a calendar-year plan year and that
chose to apply the new safe harbor expense for certain disasters in
2018, the deadline to adopt such an interim amendment for the new
expense would be the tax-filing deadline (plus extensions) for 2018.
The Treasury Department and IRS recognize that, for an employer using a
pre-approved plan, the interim amendment deadline under Rev. Proc.
2016-37 that applies for an amendment to a plan provision that is
integral to the qualification requirement that has been changed may be
earlier than the interim amendment deadline for the required amendment.
Accordingly, the Treasury Department and IRS are extending the deadline
for an interim amendment related to the hardship distribution
provisions. Under this extension, for an employer using a pre-approved
plan, the interim amendment deadline for the required amendment to the
hardship distribution provisions of the plan will also be the deadline
for all amendments integrally related to the hardship distribution
provisions (rather than the earlier deadline that might otherwise apply
under Rev. Proc. 2016-37 to those integrally related amendments). Thus,
if the employer in the example in this paragraph were to implement the
prohibition on suspensions effective for distributions made on or after
January 1, 2020, the interim amendment deadline to add the new safe
harbor expense would be the same as the deadline for the required
amendment (that is, the tax-filing deadline (plus extensions) for
2020), even if the new safe harbor expense is effective in an earlier
year.
Several commenters also requested guidance on the amendment
deadlines for pre-approved and individually designed section 403(b)
plans. Under Rev. Proc. 2017-18, 2017-5 I.R.B. 743, the remedial
amendment deadline for a section 403(b) plan is March 31, 2020. The
Treasury Department and IRS are considering providing for a later
amendment deadline for the amendments relating to the final regulations
in separate guidance.
Other Issues
Several commenters requested that the Internal Revenue Manual (IRM)
be updated to reflect the new hardship distribution rules. The IRS
intends to update the IRM to reflect the new rules in the final
regulations after publication of the final regulations.
Two commenters asked whether a plan must include every one of the
seven expenses in the Sec. 1.401(k)-1(d)(3)(ii)(B) list of deemed
immediate and heavy financial needs and cover every individual
described in the list (for example, a primary beneficiary under the
plan, in the case of certain expenses) in order to be considered as
using the safe harbor standards for hardship distributions. Under the
IRS's pre-approved plan program for qualified plans, certain section
401(k) plans that provide for hardship distributions will not be
approved unless the distributions are made under circumstances
described in the safe harbor standards in the regulations under section
401(k). For this purpose, a plan making hardship distributions for some
but not all the safe harbor expenses, or for expenses of some but not
all the categories of individuals described in Sec. 1.401(k)-
1(d)(3)(ii)(B), is considered to be using the safe harbor standards for
hardship distributions.
One commenter asked whether the proposed regulations' prohibition
on suspensions of elective contributions and employee contributions
applies to pre-approved section 403(b) plans in light of the fact that
the IRS's rules for pre-approved section 403(b) plans require that a
participant's elective deferrals be suspended for 6 months following a
hardship distribution. The prohibition on suspensions is retained in
the final regulations, and the rule applies to section 403(b) plans,
including pre-approved section 403(b) plans.
Also, one commenter asked for relief relating to the notice
requirements for safe harbor plans described in sections 401(k)(12) and
401(k)(13). Because a description of withdrawal provisions is required
to be included in the notice provided to eligible employees (see Sec.
1.401(k)-3(d)(2)(ii)(G)), if a description of the new hardship
withdrawal provisions was not already included in a notice, employees
must be provided an updated notice reflecting the new hardship
withdrawal provisions and must be given a reasonable opportunity to
change their cash or deferred election. See section III.C of Notice
2016-16, 2016-7 I.R.B. 318, for the notice-timing and election-
opportunity requirements with respect to mid-year amendments to safe
harbor plans.
Special Analyses
These regulations are not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Treasury Department and the Office of Management
and Budget regarding review of tax regulations.
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that the collection of information in these
regulations will not have a significant economic impact on a
substantial number of small entities. This certification is based on
the fact that employers with section 401(k) plans that permit hardship
withdrawals must already maintain records relating to an employee's
application for a hardship withdrawal, and the incremental cost due to
the new certification requirement in final regulations Sec. 1.401(k)-
1(d)(3)(iii)(B)(2) will be minimal. In addition, some employers,
including some small entities, use a hardship withdrawal procedure
available under the existing
[[Page 49657]]
regulations that requires an employee certification almost identical to
that in the final regulations. Therefore, a regulatory flexibility
analysis under the Regulatory Flexibility Act is not required. Pursuant
to section 7805(f) of the Code, the notice of proposed rulemaking
preceding these regulations was submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small businesses, and no comment was received.
Drafting Information
The principal author of these regulations is Roger Kuehnle of the
Office of Associate Chief Counsel (Employee Benefits, Exempt
Organizations, and Employment Taxes). However, other personnel from the
IRS and Treasury Department participated in their development.
Statement of Availability of IRS Documents
The IRS notices, revenue procedures and other guidance cited in
this preamble are published in the Internal Revenue Bulletin (or
Cumulative Bulletin) and are available from the Superintendent of
Documents, U.S. Government Publishing Office, Washington, DC 20402, or
by visiting the IRS website at https://www.irs.gov.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is 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)-0 is amended under the heading Sec. 1.401(k)-
1 by revising the entries for (d)(3)(ii) and (d)(3)(ii)(A) and (B),
adding an entry for (d)(3)(ii)(C), revising the entries for (d)(3)(iii)
and (d)(3)(iii)(A) and (B), adding an entry for (d)(3)(iii)(C),
revising the entry for (d)(3)(iv), removing the entries for
(d)(3)(iv)(A) through (F), revising the entry for (d)(3)(v), and adding
the entries for (d)(3)(v)(A) through (C) to read as follows:
Sec. 1.401(k)-0 Table of contents.
* * * * *
Sec. 1.401(k)-1 Certain cash or deferred arrangements.
* * * * *
(d) * * *
(3) * * *
(ii) Immediate and heavy financial need.
(A) In general.
(B) Deemed immediate and heavy financial need.
(C) Primary beneficiary under the plan.
(iii) Distribution necessary to satisfy financial need.
(A) Distribution may not exceed amount of need.
(B) No alternative means reasonably available.
(C) Additional conditions.
(iv) Commissioner may expand standards.
(v) Applicability date.
(A) General rule.
(B) Options for earlier application.
(C) Certain rules optional in 2019.
* * * * *
0
Par. 3. 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, redesignating
Example 6 as Example 3, and designating Examples 1 through 3 as
paragraphs (d)(6)(i) through (iii).
0
6. In newly designated paragraph (d)(6)(ii), redesignating paragraphs
(d)(6)(ii)(i) and (ii) as paragraphs (d)(6)(ii)(A) and (B).
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
[[Page 49658]]
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 each of the following requirements is
satisfied--
(1) 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;
(2) The employee has provided to the plan administrator a
representation in writing (including by using an electronic medium as
defined in Sec. 1.401(a)-21(e)(3)), or in such other form as may be
prescribed by the Commissioner, that he or she has insufficient cash or
other liquid assets reasonably available to satisfy the need; and
(3) The plan administrator does not have actual knowledge that is
contrary to the representation.
(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, 2019), 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,
a plan may not provide for a suspension of an employee's elective
contributions or employee contributions under any plan described in
section 401(a) or 403(a), any section 403(b) plan, or any eligible
governmental plan described in Sec. 1.457-2(f) 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 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) Applicability date--(A) General rule. Except as otherwise
provided in this paragraph (d)(3)(v), the rules in this paragraph
(d)(3) apply to distributions made on or after January 1, 2020. For
distributions made before January 1, 2020, the rules in 26 CFR
1.401(k)-1(d)(3) (revised as of April 1, 2019) apply.
(B) Options for earlier application. The rules in this paragraph
(d)(3) may be applied to distributions made in plan years beginning
after December 31, 2018, and 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, 2019) 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 (listing
distributions deemed to be made on account of an immediate and heavy
financial need) may be applied to distributions made on or after a date
that is as early as January 1, 2018.
(C) Certain rules optional in 2019. If, in accordance with
paragraph (d)(3)(v)(B) of this section, the rules in this paragraph
(d)(3) are applied to distributions made before January 1, 2020, then
the rules in paragraphs (d)(3)(iii)(B)(2) and (3) of this section
(relating to an employee representation) and 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 disregarded with respect to such distributions.
* * * * *
0
Par. 4. 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(i).
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. 5. 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. 6. 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
[[Page 49659]]
contributions has been suspended for 6 months.
* * * * *
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
Approved: September 5, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-20511 Filed 9-19-19; 4:15 pm]
BILLING CODE 4830-01-P