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In the new tax law, provisions concerning hardship withdrawals saw three notable changes when it comes to defined contribution plan accounts. A hardship withdrawal is only available to help employees meet heavy emergency costs, from funeral expenses, uninsured medical bills, or disaster damage costs. In previous years, when a participant took out a hardship withdrawal, they were faced with a mandatory six-month suspension of contributions, disallowing them from contributing to either their 401(k), 403(b), or 401(a) accounts. However, the new law authorizes participants to make elective deferred contributions to their plans immediately after taking a hardship distribution. 457(b) plans were not affected, as these plans utilize unforeseeable emergency distributions with specified requirements, rather than hardship withdrawals.

Additionally, prior to taking a hardship withdrawal, participants were previously required to utilize a plan loan. The new tax law, Nerrie notes, relinquishes this mandate, allowing participants to solely use hardship withdrawals.

In the past, participants could take out a hardship withdrawal for personal casualty loss, under the Internal Revenue Code (IRC). In the Tax Cuts and Jobs Act, however, this section of the IRC was amended and is now only specific to “losses attributable to a federally declared disaster area,” according to Nerrie.

“For those 401(k) and 403(b) plans that were using these, that particular hardship event is narrower,” she says. “So that actually had a more opposite effect in comparison to the other changes.”

While hardship withdrawals are potential solutions for participants searching to remedy short-term financial woes, Webb explains why these distributions lack popularity for most plan sponsors, especially in 401(k) and 403(b) plans. Most plan sponsors, he says, view employer money in a practical manner, wherein they don’t want participants withdrawing employer funds until terminating employment. This is why, in numerous 401(k) plan designs, dollars available for hardship withdrawals are limited to elective deferrals.

For 403(b) plans, Webb mentions there are differing rules with respect to distinctive types of money. If an employer contribution has always been invested in an annuity contract, plan sponsors may want to implement a hardship distribution restriction or other types of restrictions.

“Because it would be so confusing to explain that to participants, most employers simply don’t allow for hardships,” he says.