Previous regulations on hardship distributions from 401(k) and 403(b) plans generally provided that a participant could receive an in-service distribution prior to reaching age 59½ if the participant had an immediate and heavy financial need.  The determination of whether a participant had an immediate and heavy financial need was determined based on all relevant facts and circumstances.  However, to simplify administration, the regulations provided for safe-harbor hardship withdrawals that were deemed to be an immediate and heavy financial need.

Late last month, the IRS published final regulations that significantly relaxed some of the requirements under the  safe-harbor provisions.  Some of the changes are mandatory and some are permissive.  The changes are discussed in detail below.

Changes to the Safe Harbor List of Expenses

(1) Addition of Primary Beneficiary (Permissive Change)

Prior to the new final regulations, a participant was deemed to have incurred a hardship if the distribution was necessary for medical, educational, or funeral expenses of the participant, his or her spouse or dependent.  Under the new final regulations, a plan may 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.

(2) Addition of Expense Related to a Federally Declared Disaster (Permissive Change)

The new final regulations provide that a participant will be deemed to have incurred a hardship if the distribution is necessary for expenses and losses (including loss of income) sustained by a participant due to a disaster declared by FEMA.  The safe-harbor includes only disaster related expenses and losses of a participant who lived or worked in the declared disaster area and does not include expenses or losses of the participant’s relatives or dependents.

(3) Changes to Damage of Principal Residence (Permissive Change)

Previously the safe-harbor regulations provided that a participant will be deemed to have incurred a hardship if the distribution is necessary for expenses related to repair of damage to the participant’s principal residence that would qualify as a casualty deduction under Code Section 165.  The Tax Cuts and Jobs Act added Section 165(h) to the Code which provides that the deduction for a personal casualty loss generally is only available to the extent the loss is attributable to a federally declared disaster.  In response, the new final regulations clarify that 165(h) does not apply to hardship distributions such that repairs to the participant’s personal residence do not have to be attributable to a federally declared disaster.

Changes to Additional Requirements

In addition to changes to the safe harbor list of expenses above, the new final regulations make the following additional changes:

(1) Elimination of 6-Month Prohibition on Elective Contributions and Employee Contributions (Required Change no later than January 1, 2020)

Prior to the new final regulations, a distribution was deemed necessary to satisfy a financial need only if elective contributions and employee contributions were suspended for 6 months after a hardship distribution was taken.  Now, a plan is not permitted to require such suspension as a condition of obtaining a hardship distribution.

The new prohibition on the 6-month suspension does not apply to a plan subject to 409A.

 (2) Elimination of Plan Loan Requirement (Permissive Change)

Under the new final regulations, a participant is not required to take any loans available under a plan before requesting a hardship distribution.  However, a participant is still required to obtain any other currently available distributions under a plan before seeking a hardship distribution.

(3) New General Standard (Required Change no later than January 1, 2020)

Prior to the new final regulations, a participant was required to provide a representation that the financial need could not be relieved from other resources that were reasonably available to the participant.  Now, a participant must provide a representation that he or she has insufficient cash or other liquid assets that are “reasonably available” to satisfy the financial need.  The new “reasonably available” standard allows a participant to have a limited amount of liquid assets set aside for payment of an obligation in the near future, such as rent, and still obtain a hardship distribution.

Similar to prior regulations, a hardship distribution cannot be made if an employer has actual knowledge that conflicts with the participant’s representation.  However, the requirement does not impose an additional obligation on the employer to investigate the financial condition of the participant.  It should be noted that the employee representation may be made in writing, via email, and over the telephone.

Distribution from Expanded Sources (Permissive Change)

In addition to the changes discussed above, the new final regulations permit hardship distributions from 401(k) plans of elective contributions, qualified nonelective contributions (“QNECs”), qualified matching contributions (“QMACs”), and earnings on such amounts, regardless of when the amounts were contributed or earned.

For 403(b) plans, only QNECs and QMACs that are not in a custodial account may be distributed pursuant to a hardship distribution.  As well, earnings on pre-tax contributions made to a 403(b) plan are not permitted to be distributed on account of a hardship distribution.

Plan sponsors are not required to expand the available sources and may continue to limit the amounts available for hardship distributions consistent with the prior regulations.


Generally, plans need to be operationally compliant with the new regulations by January 1, 2020.  The amendment deadline for pre-approved 401(k) plans and 403(b) plans depends on several factors and can be complicated.  If you have any questions about the new final hardship regulations please contact Michael Williams or Regan Canfill.

Disclaimer: This Blog/Web Site is made available by the law firm of Liskow & Lewis, APLC (“Liskow & Lewis”) and the individual Liskow & Lewis lawyers posting to this site for educational purposes and to give you general information and a general understanding of the law only, not to provide specific legal advice as to an identified problem or issue. By using this blog site you understand and acknowledge that there is no attorney client relationship formed between you and Liskow & Lewis and/or the individual Liskow & Lewis lawyers posting to this site by virtue of your using this site. The Blog/Web Site should not be used as a substitute for legal advice from a licensed professional attorney in your state regarding a particular matter.

Privacy Policy: By subscribing to Liskow & Lewis’ E-Communications, you will receive articles and blogs with insight and analysis of legal issues that may impact your industry. Communications include firm news, insights, and events. To receive information from Liskow & Lewis, your information will be kept in a secured contact database. If at any time you would like to unsubscribe, please use the SafeUnsubscribe® link located at the bottom of every email that you receive.