XVII. Hardship distributions

Statement of Requirement: Code § 401(k)(2)(B); Reg. §§ 1.401(a)-21(e), 1.401(k)- 1(d)(3) and 301.7701-18(b)(1); Rev. Proc. 2023-37, secs. 9.03(7) and 10.02(1)(c)

(Note to reviewer: A profit-sharing plan may permit distribution of Elective Deferrals, Qualified Nonelective Contributions and Qualified Matching Contributions, in addition to earnings on each of these amounts, on account of financial hardship. A Standardized Pre- approved Plan providing for hardship distributions must satisfy the safe harbor standards at Reg. § 1.401(k)-1(d)(3). The following sample plan language is intended to satisfy the

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standards in Reg § 1.401(k)-1(d)(3). A Nonstandardized plan may include hardship distribution provisions which do not meet this standard provided that the distributions are subject to nondiscriminatory and objective criteria contained in the plan. No sample language is provided for such provisions.)

Sample Plan Language:

Distribution of Elective Deferrals, Qualified Nonelective Contributions, and Qualified Matching Contributions (and any earnings credited to a participant's Elective Deferral, Qualified Matching and Qualified Nonelective accounts) may be paid to a participant in the event of hardship. A hardship distribution may only be made on account of an immediate and heavy financial need of the employee and where the distribution is necessary to satisfy the immediate and heavy financial need. Hardship distributions are subject to the spousal consent requirements contained in Code sections 401(a)(11) and 417, if applicable.

Special Rules:

1.The following are the only financial needs considered immediate and heavy:

(1) expenses incurred for (or necessary to obtain) medical care, that would be deductible under Code section 213(d) (determined without regard to the limitations in Code section 213(a) relating to the applicable percentage of adjusted gross income and recipients of the medical care) provided that, if the recipient of the medical care is not listed in Code section 213(a), the recipient is a primary beneficiary under the Plan;

(2) costs directly related to the purchase (excluding mortgage payments) of a principal residence for the Participant;

(3) payment of tuition, related educational fees, and room and board expenses, for up to the next 12 months of post-secondary education for the Participant, the Participant’s spouse, children, or dependents (as defined in Code section 152 without regard to section 152(b)(1), (b)(2) and (d)(1)(B)), or for a primary beneficiary;

(4) payments necessary to prevent the eviction of the Participant from, or a foreclosure on the mortgage of, the Participant’s principal residence;

(5) payments for funeral or burial expenses for the Participant’s deceased parent, spouse, child, or dependent (as defined in Code section 152 without regard to section 152(d)(1)(B)), or for a deceased primary beneficiary;

(6) expenses to repair damage to the Participant’s principal residence that would qualify for a casualty loss deduction under Code section 165 (determined without regard to Code section 165(h)(5) and whether the loss exceeds 10 percent of adjusted gross income); and

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(7) expenses and losses (including loss of income) incurred by the Participant on account of a disaster declared by the Federal Emergency Management Agency (FEMA), if the Participant’s residence or principal place of business at the time of the disaster was in an area designated by FEMA for individual assistance with respect to the disaster.

An employee’s “primary beneficiary” is an individual named as a beneficiary under the Plan who has an unconditional right to all or a portion of the employee’s account balance under the Plan upon the employee’s death.

2. A distribution will be considered as necessary to satisfy an immediate and heavy financial need of the Participant only if all the following conditions are satisfied:

a. The distribution is not in excess of the amount of the immediate and heavy

financial need (including amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution);

b. The Participant has obtained all currently available distributions, other than

hardship distributions, under the Plan and all other plans of deferred compensation, whether qualified or nonqualified, maintained by the Employer;

(Note to reviewer: Section 312 of the SECURE 2.0 Act of 2022 added to Code § 401(k)(14) regarding an employer’s reliance on the certification of an employee seeking a hardship distribution. The statutory change provides that an employer can rely on a participant’s written representation (including by electronic media) that (i) a distribution is on account of an immediate and heavy financial need of a type defined in section 1 above; (ii) the distribution is not in excess of the amount required to satisfy the financial need identified above; and (iii) the Participant has insufficient cash or other liquid assets reasonably available to satisfy the need. If these conditions are met and the Employer does not have actual knowledge that is contrary to these three representations, an employer can rely on the participant’s certification and grant a hardship distribution. Act section 312 does not appear on the Cumulative List so sample plan language is not provided here.)

(Note to reviewer: Reg. § 1.401(k)-1(d)(3)(iii)(C) provides that a plan may not provide for a suspension of an employee’s elective deferrals or employee contributions as a condition of obtaining a hardship distribution. A plan may require a participant to take any available loan under the plan prior to requesting a hardship distribution; however, this is no longer a requirement.)