IRS Issues Clarifying Revenue Procedure on 401(k) Hardship Distribution Amendments

On December 12, 2019 – just in time for the Holidays – the IRS issued Revenue Procedure (“Rev. Proc.”) 2020-9 addressing plan amendments made with respect to hardship distributions (also known as hardship withdrawals) taken from 401(k) retirement plans. Generally stated, the Rev. Proc makes certain clarifications to the final regulations that were issued in September 2019 in connection with plan amendments made in response to such final regulations. See our previous blog for a quick recap.

Among the more significant revisions made by the final regulations, which are covered in greater detail in the blog referenced above, are: (i) the elimination of the former six-month suspension of deferrals requirement; and (ii) the elimination of the previous requirement that participants take a plan loan prior to taking a hardship distribution. The final regs also expanded the list of safe-harbor expenses that are automatically deemed to constitute “hardship” for purposes of these types of distributions.

The final regulations required many 401(k) plans to make plan amendments on or before the last day of 2021, as further explained below.

Clarifying Changes Made by the New Rev. Proc. Rev. Proc. 2020-9 mainly clarifies issues that have arisen in connection with certain 401(k) plan amendments that must be made in response to the final regulations. Specifically, the final regs require many 401(k) plans to be amended to:

• Remove plan provisions that had previously suspended contributions following a hardship distribution of elective deferrals; and/or
• Add plan provisions to require participants seeking hardship distributions to make certain representations regarding their need for the distributions.

Timing. Individually designed plans (there are special rules for pre-approved plans) generally must adopt plan amendments correcting “disqualifying plan provisions” (which include the absence of any provision, such as those provisions required by the final regs) by no later than December 31, 2021—the end of the second calendar year that begins after the changes appeared in the 2019 Required Amendments List.

For these purposes, a “disqualifying plan provision” includes all 401(k) plan provisions that are “integral to” the disqualifying provision.

What Provisions Are “Integral To” a Disqualifying Provision? The Rev. Proc. clarifies that individually designed plan amendments can be treated as being “integral to” a disqualifying hardship provision if they: (i) “relate to” a plan’s hardship distribution provisions; and (ii) are effective no later than January 1, 2020 (which is the latest permissible effective date for individually designed plan required amendments). Notably, it does not matter whether or not the amendments were implemented earlier than for hardship distributions made on or after January 1, 2020.

OBSERVATION: Unfortunately, the IRS has not given us any specific examples of the types of amendments that might be deemed to “relate to” a plan’s hardship distribution provisions, but the words “relate to” are in themselves undeniably broad. It would appear that any plan provision having to do specifically with the plan’s hardship distribution rules, which would seemingly include hardship distribution application procedures, standards for participant representations, and/or hardship distribution payment methods, would meet the requirements – assuming that such provision is effective no later than January 1, 2020.

The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions regarding hardship distributions, required plan amendments, or other issues concerning your 401(k) retirement plan, please consult your own ERISA attorney or advisor.