(b)lines Ask the Experts – Requiring Participants to Take Loans Prior to Hardships

“However, if we want to retain the requirement that a participant take such loans prior to being eligible for a hardship distribution, can we?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

Yes. As the Experts addressed in a prior Ask the Experts column, many plan sponsors do feel that this particular provision (requiring that loans be take prior to a hardship distribution) in their retirement plans minimizes plan leakage, thus preserving retirement plan assets for their intended purpose; namely, retirement.

And, the proposed regulations do indeed specifically address this issue, as follows (boldface text reflects the Experts emphasis):

“Additional conditions. A plan generally may provide for additional conditions, such as those described in 26 CFR 1.401(k)-1(d)(3)(iv)(B) and (C) (revised as of April 1, 2018) or, for distributions made before January 1, 2020, the representation described in paragraph (d)(3)(iii)(B) of this section, to demonstrate that a distribution is necessary to satisfy an immediate and heavy financial need of an employee. For example, a plan may provide that, before a hardship distribution may be made, an employee must obtain all nontaxable loans (determined at the time a loan is made) available under the plan and all other plans maintained by the employer. However, for a distribution that is made on or after January 1, 2020, a plan may not provide for a suspension of an employee’s elective contributions or employee contributions as a condition of obtaining a hardship distribution.”

Thus, if the proposed regulations are adopted as drafted, it is clear that a plan sponsor may continue to require that all available loans from all retirement plans of the plan sponsor be taken prior to a hardship distribution being issued.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.