Wouldn’t it be nice for employers if 401(k) plan hardship distributions were easier to administer? And wouldn’t it be nice for participants if the rules surrounding the withdrawals were more reasonable? It’s a big deal for a participant in a retirement savings plan to withdraw their own money from the plan. A distributable event (such as separation of service or reaching a certain age) must precede the distribution request. The IRS has allowed 401(k) plans to let participants to take monies out of the plan if they experience an urgent financial need. In such an instance, the plan administrator must judge the need and determine whether or not the money can be distributed to the participant under the plan’s hardship distribution rules.
The process has brought angst to any plan messenger misfortunate enough to have to explain to a desperate participant that they cannot access their own money. Because hardship withdrawals permanently reduce an employee’s account balance, the IRS has placed stringent rules on how and when a participant can take a distribution — even if it’s for a financial need. The onus on the plan administrator has traditionally been relieved by the IRS providing safe harbor reasons that would automatically be determined as acceptable if some requirements were met. However, stringent rules surrounding the withdrawal made the participant’s access less than accessible. The IRS, more or less, heard the outcry of participants and plan sponsors alike, and issued final rules that will relax some of the more arduous guidelines. The new guidelines are set to take effect January 1, 2020, and some of them are mandatory for plan sponsors to adopt.
Consider first whether or not your 401(k) plan already allows for hardship distributions. If so, calendar year plans will need to be amended to reflect these new rules by December 31, 2021, but operational changes will be needed to comply by January 1, 2020. Such changes will also need to be communicated to employees in a timely manner as well.
Back in 2011, the Department of Labor (DOL) issued a formal Request for Information soliciting comments from any interested parties on whether and how the DOL could enhance its existing electronic disclosure rules — which were issued in 2002. Kudos to the Department for shrewdly recognizing that there may have been some technological advances during the first decade of the twenty-first century. And the public agreed, responding with 78 comment letters advising the DOL about what improvements could be made.
Fast forward to today (rather, October 23, 2019) and we are beginning to bear witness to the fruits of the Department’s sluggish endeavor: recently published proposed regulations providing new safe harbor electronic distribution rules for all participant notices required by ERISA, including a plan’s Summary Plan Description (SPD). As part of the President’s Executive Order of Strengthening Retirement Security, the new safe harbor will not only ensure safer communication between plan administrators and participants, but it is estimated that plan costs will be reduced by $2.4 billion over the next 10 years.
The new safe harbor only applies to retirement plan disclosures (health and welfare disclosures remain on the wish lists of rabid ERISA fans) and may become final sooner rather than later, as the comment period is an unusually brief 30 days. A sampling of the newly proposed means for plan administrators to electronically deliver plan documents include:
2020 is a realistic prediction for when the final rules may be published, with a potential effective date of January 1, 2021. Since the new safe harbor is not a mandate, the DOL has asked for comments as to whether the applicability date could be accelerated. Stay tuned.
Plan sponsors subject to ERISA can learn more about these and other compliance obligations at our upcoming year-end compliance webinar on December 3.
Bret works with HR professionals to ensure they have a clear understanding of the rules governing all aspects of human resources. He works with employers to maintain compliance of health and wellness benefit packages under state and federal guidelines, including taxation and healthcare reform.
Bret works with HR professionals to ensure they have a clear understanding of the rules governing all aspects of human resources. He works with employers to maintain compliance of health and wellness benefit packages under state and federal guidelines, including rules of taxation and healthcare reform. Bret holds a bachelor of science in economics from the University of Kentucky and a law degree from the University of Pittsburgh, School of Law.
In our 2015 MarketPulse trend study, we introduce our first annual WellnessPulse benchmarking study, in which we survey our clients about their wellness programs and share key results. We also cover trends in executive compensation and benefits, health plan design, healthcare reform, social engineering and cyber risks, workers' compensation, and retirement benefits.
Download the PDF: MarketPulse 2015
Retirement planning is very different from planning for other benefits because the end goal is many years – even decades – away. It’s impossible to develop a foolproof plan that will guide a 25 year-old to her retirement 40 years later. But the practice of planning, the financial education obtained and the savings habits created along the journey can steer employees closer to reaching their retirement goals.
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