CLIENT ALERT: IRS Announces 2019 Changes to the 401(k) Plans’ Hardship Distribution Rules and the New Cost of Living Adjustments
On November 9, 2018, the Department of Treasury (“Treasury”) issued proposed regulations regarding hardship distributions rules, which were amended by the Tax Cuts and Jobs Act of 2018 (the “TCJA”) and the Bipartisan Budget Act of 2018 (the “BBA”). These new rules will take effect on January 1, 2019.
Background
Under the qualification rules for 401(k) plans, employee elective deferrals, employer matching contributions, and earnings on plan contributions may generally not be distributed to employees prior to severance from employment, reaching the age of 59½ years, death, or disability. An exception is provided for hardship distributions. The new changes include:
- Elimination of the 6-month prohibition on making plan contributions following a hardship distribution.
- Removal of the requirement that employees must take plan loans prior to receiving a hardship distribution.
- Expansion of hardship distributions to include qualified matching contributions (“QMACs”), qualified nonelective employer contributions (“QNECs”), and income earned on these contributions.
The proposed regulations also ease the burdens on plan administrators:
- Eliminate the facts and circumstances analysis for plan administrators to determine if distributions are necessary to satisfy a financial need. The new rules implement a general standard under which 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), and the employee must have obtained other available distributions under the employer’s plans. For hardship distributions made on and after January 1, 2020, the employee must represent that he or she has insufficient cash or other liquid assets to satisfy the financial need.
- In contrast to the old rules which barred distributions from QMACs, QNECs, and income earned on these amounts, the new rules permit hardship distributions from these sources, regardless of when contributed or earned. However, plan sponsors may (1) limit the types of contributions available for hardship distributions and (2) whether the earnings on such contributions are included.
Plan Amendments
To reflect these changes, plan sponsors will need to amend their plan’s hardship distribution provisions. While the effective date for the proposed regulations is generally for plan years beginning on or after January 1, 2019, the deadline for the required plan amendments has not yet been announced by the IRS.
2019 Qualified Retirement Plan Limitations
The IRS also announced in November (Notice 2018-83; IRB: 2018-47) the annual cost-of-living adjustments that impact all qualified retirement plans for the 2019 tax year. Several of the adjusted amounts include:
| 2018 Limitation | 2019 Limitation | |
| Elective Deferrals The pretax limit for elective deferrals to 401(k), 403(b), and most 457(b) plans. | $18,500 | $19,000 |
| Catch-up Contributions The annual limitation for additional contributions that can be made by individuals ages 50 and over to 401(k), 403(b), and 457(b) plans. | $6,000 | $6,000 |
| Defined Contribution Plans The maximum contribution limitation to defined contribution plans. | $55,000 | $56,000 |
| Defined Benefit Plans The limitation on the annual benefit under a defined benefit plan (or, if less, 100% of the employee’s average compensation for his or her highest 3 consecutive calendar years). | $220,000 | $225,000 |
| Annual Compensation Limit: The maximum amount of compensation that may be taken into account for certain benefit calculations. | $275,000 | $280,000 |
| SIMPLE Deferral Limit Limitation on deferrals to a SIMPLE retirement account. | $12,500 | $13,000 |
| SIMPLE Catch-Up Limit The annual limitation for additional contributions that can be made by individuals ages 50 and over to SIMPLE plans. | $3,000 | $3,000 |
| Social Security Taxable Wage Base Maximum amount of earned income upon which Social Security taxes may be imposed. | $128,400 | $132,900 |
Please contact the Olshan attorney with whom you regularly work or one of the attorneys below if you would like to discuss further or have questions.
This publication is issued by Olshan Frome Wolosky LLP for informational purposes only and does not constitute legal advice or establish an attorney-client relationship. In some jurisdictions, this publication may be considered attorney advertising.
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