Amendments Proposed for Hardship Withdrawal Regulations.
Art by Enan Liang
plan sponsors using the IRS safe harbor list of expenses for which they can grant hardship distributions may want to pay extra attention to the agency’s mid-November notice of proposed rulemaking. The amendments proposed therein reflect statutory changes affecting 401(k) plans. They also include recent changes made by the Bipartisan Budget Act of 2018, which directs the IRS to release regulations that formalize changes Congress has approved.
• Add “primary beneficiary under the plan,” referring to an individual for whom qualifying medical, educational and funeral expenses may be incurred;
• Clarify that a principal residence that sustains damage does not have to be in a federally declared disaster area to qualify for a casualty deduction under IRC Section 165; and
• Add to the list a new type of expense resulting from certain disasters designated by the Federal Emergency Management Agency (FEMA).
Further, the proposed regulations eliminate the rules requiring the determination to be made based on all of the relevant facts and circumstances. Instead, the proposal gives one general standard for making the assessment. Under this general standard, a hardship distribution may not exceed the amount of an employee’s need. Covered might also be the cost of federal, state or local income taxes, or penalties reasonably anticipated to result from the distribution. However, the employee must have first obtained all other available distributions under his employer’s plan and must represent that he has insufficient cash or other liquid assets to satisfy the financial need.
A plan administrator may rely on such a representation unless having actual knowledge to the contrary.
Still, a plan could limit the type of contributions that could be used and whether earnings on those would be included. Safe harbor contributions made to a plan described in Section 401(k)(13) may also be distributed on account of an employee’s hardship, because these contributions would be subject to the same distribution limitations applicable to QNECs and QMACs.
Amounts attributable to QNECs and QMACs may be distributed from a 403(b) plan only to the extent that the hardship is a permitted distributable event for such nonelective savings. Thus, QNECs and QMACs in a 403(b) plan that are not in a custodial account may be distributed due to hardship, but QNECs and QMACs in a 403(b) custodial account are ineligible.
The Treasury Department and the IRS expect that, if these regulations are finalized as proposed, plan sponsors will need to amend their plans.
The process for ascertaining the deadline to amend a disqualifying provision is set forth in Revenue Procedure 2016-37. For example, for an individually designed, nongovernment plan, the deadline to amend the plan for a change in qualification requirements is the end of the second calendar year beginning after the issue of the Required Amendments List that includes the change.
“incident dates” updated by FEMA. Relief is provided through March 15, 2019.
More from Washington and the Courts
Changes to Financial Audits Approved
The Auditing Standards Board (ASB) has voted to adopt a new auditing standard: “Statement on Auditing Standards (SAS), Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA [Employee Retirement Income Security Act].” Proposed in April 2017, the SAS addresses auditors’ responsibility to form an opinion and report on the financial statements of ERISA plans and specifies the form and content of such reporting. Auditors would evaluate plan provisions relating to an ERISA plan’s financial statements and report when management limits the audit’s scope in accordance with ERISA Section 103(a)(3)(C).
The ASB expects to consider amendments addressing, for example: engagement acceptance requirements ancillary to AU-C Section 210; new performance requirements that serve as a basis for a new reporting requirement, “Report on Specific Plan Provisions Relating to the Financial Statements”; new required procedures when the ERISA-permitted audit scope limitation is imposed; written management representations ancillary to AU-C Section 580; considerations relating to filing Form 5500, which the auditor’s report accompanies; an expanded description of management’s responsibilities; and expanded communications on ERISA supplemental schedules.
Although the ASB has voted to issue this SAS as a final standard, it expects to consider whether conforming amendments to it will be necessary once the “Proposed Statements on Auditing Standards Auditor Reporting and Related Amendments” is also approved. This is expected to occur in the first half of 2019 and to become effective for financial statements audits for periods ending on or after December 15, 2020.
USC Asks SCOTUS to Weigh In on Arbitration
In its petition, USC says the Supreme Court has repeatedly recognized, and granted certiorari to vindicate, the “liberal federal policy favoring arbitration” embodied in the Federal Arbitration Act (FAA). That policy requires, among other things, that “ambiguities as to the scope of [an] arbitration clause” be “resolved in favor of arbitration.”
Fiduciary Roles in Auto-Portability Solution
The Department of Labor (DOL) has issued an advisory opinion letter in response to a request by J. Spencer Williams, founder, president and CEO of Retirement Clearinghouse (RCH). Williams was seeking the department’s opinion on the status of certain parties as “fiduciaries” within the meaning of Section 3(21)(A) of the Employee Retirement Income Security Act (ERISA) and Section 4975(e)(3) of the Internal Revenue Code (IRC); he made the request because of actions undertaken as part of RCH’s Auto[matic]-Portability Program. The RCH program portability services mentioned in the request involve automatic rollovers of mandatory distributions and account balances from terminated workers’ defined contribution (DC) plans into default individual retirement accounts (IRAs), and the subsequent automatic roll-in of funds in the default IRA to an individual account plan maintained by a new employer when the IRA owner changes jobs.
The department adds that the responsible plan fiduciaries must also monitor the arrangement and periodically ensure that the plan’s continued participation in the program is consistent with ERISA standards. Still, the DOL notes, a plan sponsor that may be a fiduciary with respect to certain activities relating to the RCH program is not necessarily a fiduciary with respect to all aspects of the program. (For more on this topic, see Saxon Angle, page 55.)
403(b) Plans’ ‘Once-In, Always-In’ Condition
The relief from the OIAI condition includes: relief as to plan operations for a transition period, which ends on April 1, 2020; relief regarding plan language; and a fresh-start opportunity after the relief period ends. The period starts with taxable years beginning after December 31, 2008--the general effective date for the 403(b) regulations.
preapproved plan document and to make sure their plan has been operating in accordance with the plan terms.