Now that two weeks have passed since the Internal Revenue Service released its proposed hardship regulations, most defined contribution plan sponsors have determined which changes to their plan's hardship programs (if any) will be effective beginning January 1, 2019 (for calendar year plans), and which changes will be postponed. One of the changes that we see being almost universally adopted as early as possible is the elimination of the six-month suspension of contributions following a hardship withdrawal. However, there are two consequences of this removal of the suspension requirement that are sometimes overlooked:
- Communication with Participants. Plans have different procedures to end hardship suspensions—some automatically reinstate contribution elections and others require participants to make new elections following the suspension. In either case, a plan administrator removing the suspension before the six months would otherwise elapse (e.g., January 1, 2019) should consider letting participants know about the change before the end of this year so that the participants do not miss out on making a new deferral election (or are not surprised when a deferral election is automatically reinstated). But even in cases where no change is being made to existing hardships, if the plan is eliminating the suspension for new hardships taken in 2019, the plan administrator should consider notifying participants who apply for hardship withdrawals during these final weeks of 2018 of the imminent change in the plan’s hardship withdrawal rules. In addition, as many plans have outsourced management of the hardship withdrawal program to a recordkeeper or other manager, plan administrators are encouraged to discuss a communication strategy with their recordkeepers or other managers (e.g., affirmatively reaching out to participants, including a description of the change with hardship request forms).
- Nonqualified Plans. Often overlooked in discussions on eliminating the suspension requirement following hardship withdrawals is the impact this change has on nonqualified deferred compensation plans. By way of background, the suspension requirements in the current hardship regulations (before modification by the proposed regulations) require that participants be suspended from making contributions into all plans sponsored by the plan sponsor, which includes nonqualified plans. In order to accommodate this requirement, the applicable Treasury Regulations governing nonqualified deferred compensation plans subject to Internal Revenue Code Section 409A expressly allow a plan to provide for the cancellation of an otherwise irrevocable nonqualified plan deferral election following a hardship withdrawal. Some nonqualified deferred compensation plans are drafted to provide for the cancellation of a deferral election only if such cancellation is required under the rules governing the defined contribution plan. Other nonqualified deferred compensation plans mandate the cancellation of a deferral election following any hardship withdrawal, regardless of the circumstances. The proposed hardship regulations were silent as to whether a nonqualified deferred compensation plan can continue to cancel deferral elections following a hardship withdrawal. Considering that effective January 1, 2019, suspensions following hardship withdrawals will no longer be required, plan sponsors with nonqualified plans may wish to review the suspension language in their nonqualified deferred compensation plans to determine whether any changes need to be made in light of the proposed regulations.
If you have any questions about these changes or what they mean to your plans, please feel free to reach out the authors or your Morgan Lewis contact.