Need to take a hardship distribution?
In the Bipartisan Budget Act (“Act”) passed in February 2018, Congress softened provisions on hardship distributions from 401(k) plans.
Effective for plan years beginning after December 31, 2018, if a participant takes a hardship distribution from a 401(k), the participant will be able to continue to make elective deferrals or other contributions to the plan immediately after the hardship distribution.
The Act also permits hardship distributions to be sourced from not only elective deferrals, but also qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs), as well as earnings on any of these contributions.
The Tax Cuts and Jobs Act (“TCJA”) made a negative, and perhaps unintended, change to hardship distributions. The safe harbor standards for hardship distributions under the 401k(k) regulations allow a hardship distribution for repairing damage to a principal residence that would quality for a personal casualty deduction. Unfortunately, the TCJA limits the deductibility of a personal casualty loss effective for plan years beginning after December 31, 2018 to only losses attributable to a federally declared disaster. That means that an isolated casualty loss, such as from a home fire, will not qualify for a hardship distributions under the safe harbor rules.