The Bipartisan Budget Act of 2018 (the “Act”) was signed into law by President Donald Trump on Feb. 9, 2018. The Act contains several tax-related provisions which ease the rules governing hardship withdrawals from 401(k) and 403(b) plans, and the changes are effective in plan years beginning after Dec. 31, 2018. The new changes are as follows:

  • The current rule that an employee is required to take plan loans before having a hardship distribution is eliminated. An employee is no longer required to obtain available loans under the plan before he or she is entitled to a hardship withdrawal.
  • Currently, an employee may only make a hardship withdrawal from salary deferral contribution source, excluding earnings on those contributions. For plan years beginning after Dec. 31, 2018, an employee will be permitted to make withdrawals upon hardship from various sources, including: (1) elective contributions, (2) qualified nonelective contributions, (3) qualified matching contributions, and (4) earnings on these amounts.
  • Under current law, employees are prohibited from making new contributions for six months after taking a hardship withdrawal. In order to carry out the purpose of the modification, the Act directs the Treasury to modify relevant regulations, including eliminating the six-month suspension of contributions.

In summary, hardship withdrawals from employer-sponsored 401(k) and 403(b) plans will be easier to make under the new provisions under the Act. Furthermore, the availability of hardship withdrawals is expanded to include qualified nonelective contributions, qualified matching contributions and earnings on contributions. In addition, the employees are no longer required to take plan loans before taking a hardship withdrawal, and will be able to put money back to their plans and continue saving for retirement without the six-month suspension.

Changes in the administration of hardship withdrawals, and corresponding plan amendments, will be required.