As a part of the 2017 tax reform legislation, Congress directed the IRS to make certain changes to its hardship distribution regulations for 401(k) and 403(b) plans. In September of this year, the IRS finalized those regulations as previously discussed here.
As stated in the final regulations, the IRS expects that plans will need to adopt amendments to comply with the modified hardship distributions rules. To assist plan sponsors and providers of IRS pre-approved plan documents, the IRS issued Notice 2019-64 and Rev. Proc. 2020-9.
IRS Notice 2019-64 is the annual Required Amendment list for qualified plans and 403(b) plans. The list identifies changes in the statutory and regulatory requirements for retirement plans and the related amendment deadlines.
For both individually designed qualified plans and 403(b) plans, Notice 2019-64 added the hardship distribution regulations to the 2019 list of Required Amendments and set a deadline of Dec. 31, 2021 for plans to adopt amendments consistent with the requirements of the final hardship distribution regulations.
In general, pre-approved plans follow the six-year remedial amendment restatement cycle system set forth in Rev. Proc. 2016-37. This procedure requires pre-approved plans to adopt interim amendments (amendments required to update a plan document for recent law changes, but which do not require the employer to restate the entire plan document, or in other words, add-on amendments) to remain in compliance with changes to plan qualification requirements during the six-year cycle. Rev. Proc. 2020-9 identifies the hardship distribution regulations as a change for which pre-approved plans must adopt an interim amendment.
Rev. Proc. 2020-9 sets Dec. 31, 2021, as the deadline for pre-approved plans to adopt an interim amendment related to the modified hardship distribution. Specifically, the interim plan amendments must:
- Remove any plan provisions suspending an employee’s contributions following a hardship distribution of elective deferrals; and
- Include an amendment requiring an employee’s representation relating to his or her need for a hardship distribution, if the plan does not already provide for such a representation.
Additionally, Rev. Proc. 2020-9 clarifies that the following will be treated as an amendment to a provision that is integrally related to a new IRS qualification requirement:
- Changes to section 165 (relating to casualty losses);
- Adding the new safe harbor expense (relating to expenses incurred as a result of certain federally declared disasters); and
- The extension of the relief to victims of Hurricanes Florence and Michael.
Accordingly, amendments related to these three items are also timely if adopted by Dec. 31, 2021.