Sponsors of 401(k) and 403(b) plans and their record keepers are moving quickly to satisfy new IRS regulations that will make it easier for plan participants to take hardship withdrawals from their retirement accounts.
Beginning Jan. 1, employees will be able to keep contributing to their accounts should they need to withdraw funds for hardships such as medical expenses. That marks a departure from previous IRS rules that required employers to suspend employee contributions for six months following a hardship distribution.
The new rule is part of a package of mandatory and voluntary measures that the IRS developed at Congress' behest to ease restrictions on hardship withdrawals. Plan sponsors will, for example, also be able to allow participants to withdraw qualified employer contributions, which was previously forbidden, and will no longer have to require participants to take all available plan loans before taking a hardship withdrawal.
The regulations — finalized Sept. 23 after a nearly yearlong comment and review period — have earned support among plan sponsors as they look to encourage participants to preserve their retirement savings while also giving them access to the funds for true financial hardships. While some sponsors had concerns about plan leakage, the flexibility of the rules helped alleviate those worries, industry observers said.
Participants already face significant deterrents to taking hardship distributions because they must pay taxes on the money plus a 10% early withdrawal penalty if they're under 59½, an obstacle that will not change with the new rules, said Brenda Grabowski, the Milwaukee-based total rewards manager in the human resources department of Mortgage Guaranty Insurance Corp., a publicly traded mortgage insurance company.
"When we do have a participant that needs to do that, it's really their last resort option," she said of participants who request hardship distributions from the $320 million 401(k) plan. Why then, she asked, would the company further penalize participants in already difficult financial situations by suspending their contributions or forcing them to take a loan they can't repay.
Michael Francis, president and chief investment officer of registered investment adviser Francis Investment Counsel LLC in Brookfield, Wis., sees many clients sharing similar views. "Our experience talking with plan sponsors is that they are by and large adopting the whole package hook, line and sinker," he said of the new regulations. "Even organizations that are protective (of preserving savings) are saying, 'Look, if it is in fact a true financial need, we should do this.' "