Most plan sponsors that implemented the IRS' more lenient hardship withdrawal rules ahead of the required Jan. 1 implementation have not seen an uptick in the number of participants taking hardship distributions, according to a survey by the Plan Sponsor Council of America.
Of the 145 plan sponsors surveyed, 64.6% adopted the new hardship provisions, and of those, 72.6% reported no changes in the level of hardship withdrawals in 2019 with only 17.8% reporting an uptick, the survey found.
The new regulations include mandatory and voluntary measures that the IRS developed at Congress' behest to ease restrictions on hardship withdrawals. The rules require plan sponsors, for example, to stop the six-month suspension of participant contributions following a hardship distribution, which sponsors were previously required to do. The rules also give sponsors the option of adopting voluntary provisions, including removing the current requirement that participants take all available plan loans prior to taking a hardship withdrawal from the plan.
"Congress' action to liberalize the requirement for hardship withdrawals is a welcome change for those who use 401(k) monies to stave off financial ruin, or cope with emergencies. However, because of the potential long-term impact of expanded hardship withdrawals, it is critical to keep a close eye on how these changes affect retirement security," Hattie Greenan, PSCA's director of research, said in a news release.
Most plan sponsors supported the removal of the six-month suspension of employee deferrals with 59.3% saying it was a "wonderful idea" and 24.8% saying they were "OK with it." The majority of plan sponsors also seemed to support the provision eliminating the requirement for participants to take plan loans first, with 22.1% describing it as a wonderful idea and 32.7% being OK with it. However, nearly 30% thought it was either "going to be a problem" or "the bad seems to outweigh the good."
