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The final regulations eliminate the rules in existing Regs. 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. A distribution is not treated as necessary to satisfy an employee’s immediate and heavy financial need if 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 the new regulations, a distribution is treated as necessary to satisfy an immediate and heavy financial need of an employee only to the extent that:

• 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);
• The employee has obtained all other currently available distributions (including distributions of ESOP dividends under Sec. 404(k), but not hardship distributions) under the plan and all other deferred compensation plans, whether qualified or nonqualified, maintained by the employer;
• The employee has provided the plan administrator with a written representation that he or she has insufficient cash or other liquid assets reasonably available to satisfy the need; and
• The plan administrator does not have actual knowledge that is contrary to the representation.

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 other specified resources.

The final regulations also modify the safe-harbor list of expenses in existing Regs. 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.

Casualty loss hardship

Because the casualty loss rules were amended by the law known as the Tax Cuts and Jobs Act, P.L.115-97, so that taxpayers only qualify for a casualty loss deduction if they are in a federally declared disaster area, the new regulations provide that only disaster-related expenses and losses of an employee who lived or worked in the disaster area will qualify for the new safe harbor, and the expenses and losses of the employee’s relatives and dependents will not, unlike under the IRS’s disaster relief provisions.

The BBA’s changes to the hardship distribution rules apply to plan years beginning after Dec. 31, 2018. The IRS provided flexible rules for the various effective dates in the regulations because of the necessity for plan amendments to implement the new rules.

— Sally P. Schreiber, Final regs. loosen 401(k) hardship distribution requirements, Journal of Accountancy,[Internet], September 20, 2019