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.