IRS Proposes Updates to Hardship Distribution Regulations (NPRM REG-107813-18)

The IRS is proposing to amend hardship distribution regulations to reflect changes in the law. In particular, the proposed regulations would reflect changes in the Bipartisan Budget Act of 2018 (P.L. 115-123), and the Tax Cuts and Jobs Act (P.L. 115-97). The IRS is also proposing housekeeping changes to reflect older legislation.

Deemed Immediate and Heavy Financial Need Safe Harbor

Residential casualty losses. The proposed regulations clarify the meaning of “casualty loss” to a principal residence for purposes of a hardship withdrawal is unaffected by the new Code Sec. 165(h)(5) limit. The Tax Cut Act added that provision to limit the deduction to losses attributable to a federally declared disaster area for years 2018 through 2025, but the proposed regulations thankfully decouple the limit from the hardship withdrawal rules.

Disaster area expenses. The proposed regulations would add a new expense category for damage incurred in a federally declared disaster areas. The new safe harbor expense would be similar to relief given by the IRS after Hurricane Maria and the California wildfires in Announcement 2017-15, I.R.B. 2017-47. The change is intended to eliminate any delay or uncertainty concerning access to plan funds following a disaster that occurs in an area designated by the Federal Emergency Management Agency for individual assistance.

Distribution Necessary to Satisfy Financial Need

The proposed regulations reflect the changes directed by the Bipartisan Budget Act, including—

– eliminating the 6-month prohibition on contributions following a hardship distribution, and

– allowing a distribution even though the employee did not take any available loan under the plan.

Amount Available for Hardship Withdrawal

The proposed regulations reflect the Bipartisan Budget Act’s increase in the maximum amount available for distribution by adding non-grandfathered QNECs, QMACs, and earnings on these contributions.

Applicability dates. The changes to the hardship distribution rules generally would apply to distributions made in plan years beginning after December 31, 2018. However, the prohibition on suspending an employee’s elective contributions and employee contributions as a condition of obtaining a hardship distribution may be applied as of the first day of the first plan year beginning after December 31, 2018, even if the distribution was made in the prior plan year. The revised list of safe harbor expenses may be applied to distributions made on or after a date that is as early as January 1, 2018.

Comments. Comments and requests for a public hearing must be received by 60 days after November 11, 2018. Send submissions to CC:PA:LPD:PR (REG-107813-18) Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR (REG-107813- 18), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC 20224, or sent electronically via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-107813-18).

Proposed Regulations, NPRM REG-107813-18

Other References:

Code Sec. 401

CCH Reference – 2018FED ¶18,110F

CCH Reference – 2018FED ¶18,111E

CCH Reference – 2018FED ¶18,111P

CCH Reference – 2018FED ¶18,122G

Tax Research Consultant

CCH Reference – TRC RETIRE: 3,302

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CCHTaxGroup

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