SMM For New Hardship Rules

What are people doing to notify participants about the new hardship distribution rules, since the document providers have yet to issue their stuff? At least Relius has not yet done so...

Related discussion:

 

If a plan's sponsor has not amended its plan, there might be little or nothing for the plan's administrator to explain to the plan's participants.

17 hours ago, austin3515 said:

What are people doing to notify participants about the new hardship distribution rules, since the document providers have yet to issue their stuff? At least Relius has not yet done so...

Nothing, for sure, until we know what the provisions will be.  Seems there are some decisions to be made; not all automatic stuff.

Wonderful.  But participants can still take a hardship from Safe Harbor Accounts on 1/2/2019 though.  I wonder if the recordkeepers are even ready to do that.

Like @Bird, we are holding off until we know more.  No amendment no distribution ?

52 minutes ago, austin3515 said:

Wonderful.  But participants can still take a hardship from Safe Harbor Accounts on 1/2/2019 though.  I wonder if the recordkeepers are even ready to do that.

Only if the document has been amended, correct?

Corbel is telling me the amendments wont be ready and don't need to be signed until 2020/2021 anyway (I assume that was in the proposed reg?).  It's a discretionary amendment though, so I don;t know.

I just get the feeling that no one has any idea what the heck is going on with this change, or at least certainly not from operational perspective.  Someone needs to write an article...

44 minutes ago, RatherBeGolfing said:

Like @Bird, we are holding off until we know more.  No amendment no distribution ?

So someone is losing their home, it is legal to take hardships from SHNEC, amendments won;t be finalized for months, we're saying the implementation is delayed beyond the statutory date, and this participant is "SOL"?  I am really uncomfortable with that.  I thought there was leeway to adopt amendments retroactively.

But we're saying here consensus is essentially these new rules are not yet effective???

30 minutes ago, austin3515 said:

Corbel is telling me the amendments wont be ready and don't need to be signed until 2020/2021 anyway (I assume that was in the proposed reg?).  It's a discretionary amendment though, so I don;t know.

I just get the feeling that no one has any idea what the heck is going on with this change, or at least certainly not from operational perspective.  Someone needs to write an article...

Yea the proposed regs provide 

Quote

the deadline for amending the plan to reflect a change in qualification requirements is the end of the second calendar year that begins after the issuance of the Required Amendments List described in section 9 of Rev. Proc. 2016-37 that includes the change. A plan provision that is not a disqualifying provision, but is integrally related to a plan provision that is a disqualifying provision, may be amended by the same deadline applicable to a disqualifying provision.A plan amendment that is related to the final regulations, but does not correct a disqualifying provision, including a plan amendment reflecting (1) the change to section 165 (relating to casualty losses) or (2) the addition of the new safe harbor expense (relating to expenses incurred as a result of certain federally declared disasters), will be treated as integrally related to a disqualifying provision. Therefore all amendments that relate to the final regulations will have the same amendment deadline.

But that is for the final regs.  I guess if you use something from the proposed regs that does not make it to the final regs, it would be due by the end of the calendar year?

1 minute ago, austin3515 said:

So someone is losing their home, it is legal to take hardships from SHNEC, amendments won;t be finalized for months, we're saying the implementation is delayed beyond the statutory date, and this participant is "SOL"?  I am really uncomfortable with that.  I thought there was leeway to adopt amendments retroactively.

But we're saying here consensus is essentially these new rules are not yet effective???

The law change is effective 1/1/2019, but there are still questions as to how to implement the change.  I think most people are uncomfortable with operating outside of what their document provider has prepared.  Or in other words, if you operate in a way (even if its a small detail) that is materially different from the amendment that is later prepared by the document provider, who will will amend for that provision, what is the deadline for that provision, and will you now need a det letter?

The end of the calendar year is completely safe. But I expect that the "general" deadline will apply. The "general" - I think -  rule is that plans have until the end of the second calendar year beginning after the issuance of an IRS-issued “Required Amendments List” reflecting the new rules.

But no one is using the new rules?  Every law firm out there is blasting my clients in boxes with these new exciting rules for hardship distributions.  And we're saying everyone;s response is, "maybe by the end of 2019 we can do this"?

No, I think there will be plenty of people using the new rules 1/1/19, at least in good faith.  The bigger issue is that what you do operationally needs to be in your amendment, and if you rely 100% on a document provider for amendments, are you going put something in motion operationally before you know what your document provider is going to include in the amendment?

If you have a document/compliance department that is comfortable with handling in-house anything that differs from what the document provider includes in the amendment, then I see no reason to wait longer than when it is possible from a tech/software/training standpoint.  I don't think many of the smaller TPAs are going to be in that position, but the bigger ones would.

And aren't some of the possible changes clear enough that there's little risk of getting it wrong?

 

2 hours ago, austin3515 said:

So someone is losing their home, it is legal to take hardships from SHNEC, amendments won;t be finalized for months, we're saying the implementation is delayed beyond the statutory date, and this participant is "SOL"?  I am really uncomfortable with that.  I thought there was leeway to adopt amendments retroactively.

But we're saying here consensus is essentially these new rules are not yet effective???

My first reaction to a sponsor in this scenario is to explain that the new rules are optional and they do not have to expand hardships to SHNE money if they don't want to (and I would strongly recommend against it).  I don't anticipate bringing it up at all as a meaningful option; most of my clients wouldn't want participants taking "their" contributions early and personally I think it is a horrible idea...these are, after all "retirement" plans we are working on.  But I digress.

If they insisted, then I suppose we'd operationally run the plan that way and catch up on the amendment later, as will be allowed.  As for the SMM, I guess we'd try to get it out asap...I have to be honest and say I'm not quite sure what the requirements are in this particular scenario but it's not at the top of my worry list as far as non-compliance consequences.

The addition of 401(k)(14) to the Code by the Bipartisan Budget Act of 2018, which broadens the potential sources of hardship distributions to include QNECs, QMACs, and earnings, and permits a hardship distribution without the requirement that a participant take an available loan, are effective by statute for plan years beginning on or after 1/1/2019. There is no special effective date provision for these changes in the proposed regs, but of course the Code does not mandate that an employer permit hardship distributions or make the maximum permissible amount available for them , so an employer has discretion whether, and if so when and to what degree, to implement these changes.

In addition to the broadening of the source for hardship distributions, there is also the change that plans can no longer require a suspension of deferrals for six months (i.e., they can no longer suspend at all). Because this was not a change made to the Code by BPA, but rather a directive from Congress to the IRS to change the regs, the IRS was able to provide flexibility with respect to it. Under the proposed regs, you can optionally make the change effective for hardships after 12/31/2018 or for hardships before 1/1/2019 for the portion of the 6-month period that would extend beyond 12/31/2018. You can also keep the suspension for hardship distributions made all the way through 12/31/2019, but under the proposed regs it's not optional at all for hardship distributions after 12/31/2019. So regardless of whether you've amended by then for this change (and you almost certainly will not have been required to amend for it by 12/31/2019, as explained below), you need to stop suspending for post-2019 hardship distributions.

There is also the change to the casualty loss hardship. TCJA narrowed casualty losses for Section 165 deductibility purposes from 2019 through 2025 to only those suffered in federally declared disaster areas. Because the resulting "glitch" for 401(k) hardship distributions was merely an indirect result of a TCJA change to a portion of the Code that was incorporated by reference into the IRS's hardship regs, the IRS did not have to follow it,  and the proposed regs would eliminate the requirement that an otherwise good Section 165 casualty loss occur in a federally declared disaster area in order to be a good "hardship" for 401(k) hardship distribution purposes. Some well-informed plans presumably took TCJA and the existing 401(k) regs at their word and did not permit casualty loss hardships outside of federally declared disaster areas after 12/31/2017, while some, oblivious to the change, or counting on relief from IRS, may have continued to permit casualty loss hardships outside federally declared disaster areas after 12/31/2017. Again, since these issues arose primarily under the regs, and not as a result of direct statutory changes, the IRS had leeway to provide flexibility on the effective date, and the proposed regs would bless both approaches (i.e., requiring that the casualty loss be in a federally declared disaster area, or not) through 12/31/2018.

Because the proposed regs liberally treat all of these changes (and the adding of FEMA-declared disasters to the safe harbor) as "integrally related" to changed qualification requirements, under Rev. Proc. 2016-37, plans will not be required for qualification purposes to be amended for any of these changes for a long time. For an individually designed plan, the employer has until the date that will eventually be specified in the Required Amendments List. The 2018 RAL was published today, and it does not include these new rules. In fact, there are no RAs on the 2018 RAL. So again, it will be awhile, probably at least a few years.

Preapproved plans will not be required to be amended until the end of the next 6-year cycle.

So in a sense, there is a lot of freedom as to when to implement these changes. The only change that is mandatory is no longer suspending the ability to make elective deferrals if the participant takes a hardship distribution, which must be implemented in operation no later than for hardships made in plan years beginning on and after 1/1/2020, although no amendment to the plan document will probably be required until well after that date.

However, the provisions of the eventual plan amendment will need to "walk back" and include exactly what the employer did in implementing any or all these changes, and when they did it, so it probably would be unwise to begin to implement any of them until the employer has something in writing (whether a draft amendment, a memorandum explaining what the employer intends to include in its amendment, an SMM, or an IRS model amendment) that both describes what changes it intends to implement and when it will implement them, in detail. And once the employer has done that, it will need of course to inform its employees of the change in some way. However, an SMM is not required until 210 days after the end of the plan year in which the change is implemented, so before that date a less formal communication could be considered.

So in brief, employers need to figure out, likely with the assistance of counsel and/or their consultant, which of the changes they want to make and think through all of the details. They should not, and need not, implement any of the changes until they have done that and have some sort of detailed writing specifying what they're going to do. Once they have that, they might as well implement the changes they have decided on, and of course that requires communicating those changes to participants. Under Rev. Proc. 2016-37, which did away with "good faith interim amdnements," no formal amendment will be required for quite a while. In the case of plans using preapproved documents, presumably, in order to save on costs, the employer will want to hold off on any implementation (other than stopping suspensions of elective deferrals after 2019) until the preapproved plan vendor has come up with some sort of written implementation package, which will likely include an amendment. I would suspect those will be available in the next few weeks or months.

 

SMMs. Some advisors may reasonably conclude that an interim SMM (i.e., a "pretend" SMM if you prefer) may (or should) be distributed in advance of the amendment to describe the intended interim operation of the plan pending the eventual adoption of an amendment, and then a revised SMM can be distributed (if need be) after the actual amendment is adopted (if the amendment modified the content of the interim SMM). That is why employers are currently struggling with how to draft safe harbor notices that reflect how the plan will be operated in 2019 (if such notices have, until now, referred to the suspension of deferrals upon a hardship distribution).

 

DEADLINE FOR AMENDMENT. I agree that the reference to the Required Amendment List is not applicable to all plans. The proposed regulation is merely presenting an example:

 

"For example, with respect to an individually designed plan that is not a governmental plan, the deadline for amending the plan to reflect a change in qualification requirements is the end of the second calendar year that begins after the issuance of the Required Amendments List described in section 9 of Rev. Proc. 2016-37 that includes the change."

 

That deadline is consistent with Revenue Procedure 2016-37's general procedures for NON-preapproved plans, i.e., "individually designed plans" that are not governmental plans. I disagree that preapproved plans can wait until the end of the six-year cycle, as that would render Section 15.04(1) of the new Procedure meaningless.

 

Preapproved Plans. Section 15.04(1) of IRS Revenue Procedure 2016-37 provides the deadline for required interim amendments for preapproved plans as being the time described by Regulation 1.401(b)-1(b)(3) (i.e., generally the time of the tax filing deadline following the plan year of implementation).

 

(As an aside, my cites to Procedure 2016-37 include the leading zero after the period, e.g., Section 15.04, as does the text of that Revenue Procedure. I observe, however, that the IRS (oddly) fails to use the leading zero at the start of each numbered subsection, i.e., ".4" rather than ".04" as would was typically used in the past. I am, however, looking at an advance copy, so maybe that was changed in the final copy. Whatever.)

 

Revenue Procedure 2016-37 follows the general template established by Revenue Procedure 2007-44. Why else would the new Procedure still contain the same language of the prior Procedure that "[the extension of the remedial amendment period applies to a good-faith amendment] if the amendment was adopted timely and in good faith with the intent of maintaining the qualified status of the plan. It goes on to say "The Service will make the final determination in all cases as to whether a new plan or an amendment was adopted with the good faith intention of being qualified or maintaining qualified status."

 

If we had until the end of the six-year cycle to adopt every amendment, why bother adopting an amendment at all.  Just restate.  There would be no "good faith interim" amendments as described by Sections 15.03(1).

 

Sections 15.03(1) and 15.03(2) set forth the general rules that have been with us since IRS Revenue Procedure 2007-44, i.e., that perfecting amendments (usually restatements) are required by the end of the six-year remedial amendment period, at which time any restatement will reflect (or otherwise incorporate) the employer's intent expressed in all the interim good-faith amendments that were timely adopted during six-year remedial amendment period. The language of IRS Revenue Procedure 2007-44 did not excuse the absence of timely adopted required interim amendments in 2007, and the same language appears in the new Procedure, so I infer that the new Procedure does not excuse the absence of timely adopting required good faith amendments throughout the six-year cycle. If the content of such amendments represent a good faith attempt to comply with a change in law, but fail on some technicality, then such amendment itself be retroactively amended for such technicalities discovered by the end of that cycle (during the restatement window). Such technicalities are usually resolved by the document provider when negotiating preapproved language for the then-current cycle (which will be Cycle 4 for these changes, not Cycle 3 - the Cycle 3 documents will reflect only the changes published in the 2017 Cumulative List).

 

As in the past, employers that do not adopt a timely interim amendment must be able assert a good reason for not doing so, otherwise it would be unnecessary for Section 15.03(2) of the current procedure to say (as the IRS stated in Revenue Procedure 2007-44) that "...if an employer makes such a determination [that no amendment was required] and the IRS finds that an amendment is required, the plan would still be eligible for the six-year remedial amendment cycle to correct the disqualifying provisions described in section 15.02. The IRS will make the final determination in all cases as to whether the determination that no interim amendment was required was reasonable and in good faith." Query: Can employers and advisors reasonably and in good faith determine that no timely adopted interim amendment is required under Section 15.03(2) for a change the statutory and regulatory changes to the hardship distribution rules? If not, then the amendment is either "required" (go to Section 15.04(1) for the deadline) or the amendment is "discretionary" (go to Section 15.04(2) for the deadline).

 

If we choose to characterize this amendment as a discretionary amendment under 15.04(2) rather than a required amendment under Section 15.04(1), then we can say with certainty that the earliest possible deadline is the end of the plan year of implementation (12/31/2019 at the earliest). Thus, no one can go wrong by waiting to adopt the amendment until the second half of 2019 for an amendment, and employers with preapproved plans should therefore target the second half of the 2019 plan year for evaluating such an amendment's content. Some providers have a "draft" version available for inspection and feedback.

 

The IRS can also choose to extend the deadline for a particular set of changes in the law, but has not done so, to date, for this set of changes.

 

TAXPAYER RELIANCE. I also observe that the proposed regulations do not appear to me to contain, as they often do, a statement of "taxpayer reliance." That means Treasury reserves the right to back-track on its guidance. When a proposed regulation comes with reliance, Treasury explicitly promises, within the proposed regulation, that no retroactive subsequent amendment will be required because of a change in the guidance, i.e., taxpayers "may rely" on the proposed regulation, and that "any more restrictive provision in the final regulation will not be retroactively effective." Since I can find no such statement to that effect in this regulation, I think that should give everyone pause. I offer below a potential reason why the IRS (i.e., Treasury) might choose not to commit itself to what it stated in the proposed regulation, though perhaps it is not a good example because the potential change I have in mind would be a liberalization of the regulation. The IRS is perhaps waiting to observe any push-back on one of the provisions of the proposed amendment, as follows.

 

Controversy. Recall that the proposed regulation states that employers will NOT have the option of continuing to suspend deferrals after 2019, which is a BIG issue for some employers and advisors that want to continue having that requirement in the plan as a permanent provision. Maybe that's why Treasury didn't offer reliance on the proposed regulations - it is still thinking about issues like that. And just the thought of Treasury still thinking about these issues is sufficient reason for document providers to hesitate providing "the amendment." Suppose, for example, document providers follow the proposed amendment and say that no suspension of deferrals may be imposed for hardship distributions made on or after 1/1/20, and then Treasury changes its mind, and lots of employers want to keep the suspension provision, and thus will need to amend the earlier-adopted amendment (and SMM) that document providers rushed to market. I would prefer to wait and make sure that's the final rule about the permanent impermissibility of suspensions before giving employers an ultimatum, in the form of a signed amendment, that the suspension provisions cannot be continued for hardship distributions after 2019, only to turn around and issue a subsequent amendment (and SMM) saying that they are permitted after 2019 (under my imaginary scenario that Treasury reconsiders this issue and changes its mind).

 

PESKY NEWSLETTERS. Just because a zillion law firms are trying to rustle up document business via a newsletter doesn't mean it's a good idea. Some firms even issued newsletters (can you imagine?) suggesting all the great things an employer can do after one employer in this country received a very narrow and technical Private Letter Ruling dealing with an unusual plan design whereby nonelective distribution that was disguised as a self-enrolled matching contribution was available, but only if the participant was a member of a certain group, and otherwise the participant received only the ordinary but "real" matching contribution. So because the "no contingent benefit" rule was determined by the IRS as not having been violated for that employer, now every employer in the country wants to try to do the same thing with a PPA preapproved plan. Nowhere in that Ruling was there a determination as to whether such a design could be used by a preapproved plan (the senior IRS document policy staff determine what's permitted and what isn't), nor for that matter, did the Ruling even opine on the qualified status of the plan at issue (since a PLR is not a determination letter). Providers were flooded with calls as to how to set up such a miracle plan. What percentage of those newsletters went into detail regarding all the testing, document, and potential administrative issues associated with such a complex design? How many newsletters suggested alternative and more conventional ways to assist with student debt relief? Any newsletter that omitted the gory details and potential alternatives was not useful.

 

How many "hardship" newsletters detail all the administrative and unresolved compliance issues associated with the cessation of the suspension of deferrals upon a safe harbor hardship distribution? Or is their focus on the need for an "immediate" amendment? If the latter, what is their rationale for an immediate amendment in the absence of final guidance that offers "reliance"?

 

WHAT WE HAVE HERE. Let's give Treasury some credit. Treasury wanted to, and did, issue sufficient information for employers to determine how plans should begin transitioning in operation, which is why many provisions of the proposed regulations apply to distributions beginning in 2020. More importantly, the regulations provided guidance on how to handle the cessation of the suspension of deferrals, e.g., employers will not need to stop suspending (i.e., the potential need to resume) deferrals at the stroke of midnight on New Year's Eve (this coming January 1st) simply because that is the effective date of the new law (depending on a plan's exact language (or an administrative procedure's exact language) as to what occurs at the end of a suspension period). That had been an open question prior to the proposed regulation. Now we can all enjoy our New Year's Eve and not look for all the plans that automatically restart deferrals at the end of a suspension period (which, until this guidance was issue, could reasonably be presumed to be January 1, 2019), i.e., plans that had suspension periods that had started in the second half of 2018 but that also automatically reinstate deferrals when the suspension period ends - or, in this case, might have potentially been required to end the suspension on 1/1/19 because of a change in the statute having an effective date of the first day of the 2019 plan year). Last, but not least, we now know that plans will be able to continue offering hardship distributions for casualty losses as defined prior to this most recent change to the personal tax deduction section of the Code for casualty losses (for those plans that referred to that Section of the Code).

 

WHAT'S THE RUSH? Preapproved plan document providers should not be in a hurry to get an amendment out for the sake of getting an amendment out. Employers should not be in a hurry to get a comprehensive amendment adopted for the sake of getting an amendment adopted. The only rush is trying to determine what employers want to do in response to what we know are the most likely options, and that is not an easy task. Suppose one document provider has one set of default provisions (thinking most employers want those provisions), and another document provider has another set of default provisions (with the same thought). That will be fun. Document providers have been known to talk to each other, so maybe there will be some informal consensus on what defaults to use.

 

When it is clear how the plan will be operated, e.g., whether employers will or will not acquiesce to the default provisions of document providers' "blanket" (prototype sponsor) amendments, then there should be a movement toward updating the language of the plan via an amendment. Or, if the employer is ready to do so now - then draft an amendment. Just don't expect providers to rush to market on this set of regulatory changes.

 

The expansion of source accounts available for hardship distributions is relatively straightforward. If that were the only design issue involved, I suspect amendments would already start to be offered by providers and adopted by employers. But the suspension of deferrals (or the timing of the cessation thereof), and the need to amend the technical definition of a casualty loss, and other changes mentioned in this column, represent a can of worms for those who need to adjust all the moving parts under the hood, both for the document and for the administrator. The devil, as always, is in the details, including but not limited to (in this context) what the payroll service providers can do sooner rather than later. There's no point in adopting an amendment regarding deferrals until you are sure the payroll service provider can and will comply with the employer's (or provider's) amendment(s).

 

 

Very impressive analysis of course, but omg.  This is for hardship distributions.  This is turning out to be the most complex policy change I can think of recent memory.

It occured to me that for the daily val plans, this is going to be 100% driven by whatever policies the recordkeepers implement.  Has anyone heard from them?

It seems unlikely that a big recordkeeper would now state specific commitments about what services it will provide.  Many recordkeepers depend on licensing deals for plan-documents software (and sometimes plan-administration forms), and for recordkeeping software.  Those publishers often don’t state specific commitments to a licensee until (at least) proposed regulations become adopted regulations.  Further, how those contracts state warranties or other obligations differs between required and optional provisions.

Seriously is there anyone else out there who sees thing as a giant mess?  5 weeks away the rules change and no one is ready for this.  We should have had amendments in place and the recordkeepers should have been ready to flip the switch.  None of that is possible because the IRS just issued proposed guidance.

Yet there will be demand from those in the most dire financial straights.  Am I being too pessimistic here?   

austin3515, this IS a giant mess.

 

And I think you’re right that some participants will have read something about what might be allowed, and some employers and some service providers will get questions.

 

The challenge, as ever, is about what services are provided for a plan that bought only a recordkeeper’s services when the employer doesn’t want to spend money on others.

 

The problems you anticipate are of kinds a smart lawyer can resolve (if the plan has enough negotiating leverage with its service providers, or the employer/administrator has enough internal capacity).  But few will pay for this extra attention.

 

Listen we can sort this out too, but when you talk about sorting this out for 1,000+ clients it gets to be a bit ridiculous.  And no one (aside from billion dollar plans perhaps) wants to spend a dime (let alone 5 minutes) discussing what these new rules mean for the plans.  Granted my employers are generally smaller, but even my larger clietns really haven't got much interest in what could easily be called "excruciating minutiae"

We're concurring about clients' interests.  And not a single client has asked me to do anything.

So is your observation really about Congress not providing enough time for a change?

 

I suppose it is the IRS's fault for being too late with their regs.  That seems to be the problem.  No one would do boo without knowing what the rules were going to be (and I can't say I blame them).

But maybe it is Congree's fault for jamming through a tax overhaul with a week's notice.  I know the IRS is still trying to catch-up with all the guidance needed on that front too.

Im not sure things would have been ready by 1/1/19 even if the proposed regs came out fairly soon after congress acted.  You still need a proposed reg, comments, and then a final reg.  Then the amendments have to be drafted and the software updated.  If it was 2020 rather than 2019, we probably wouldn't have proposed regs yet...

 

Well but presumably the recordkeepers would have programmed their systems based on the proposed regs and it sounds like our document provided is preparing the SMM's at least based on the proposed regs.  Probably would have been smoother with 3 more months than they were allotted.

so Congress passed a Bill, and of course misc things get tacked on, including the new hardship rules.

even without the proposed regs or final regs it was indicated you could take hardships from all sources. do you expect them to come back in the final regs and say 'we change our minds you can't take hardships from all sources?" or, do you expect your document provider to issue an interim amendment "yes you can do this but only amounts deposited after 1/1/2019" or " you can take a hardship from all sources if you stand on your head and sacrifice a goat on Tuesday"....

I could see the unanswered questions like "How do you handle someone who took a hardship in Nov. Does the 6 month suspension for deferrals still apply" need to be finalized - and even that disappears by July of 2019.

I would have to give further attention to the deadline issue regarding preapproved plan amendments. My gut tells me that IRS won't require an amendment to preapproved until they at least publish a model amendment, but again would need to review further the issues raised by Doc Ument regarding preapproved.

Regarding individually designed, or practically speaking, regarding preapproved as well, sure, the first issue is what the recordkeeper is prepared to do. Until a plan's recordkeeper has changed its system for processing hardships (i.e., paper and/or online forms, software, and training of processing personnel) to use the additional sources, not require the suspension, etc., these are a non-starters. Once the recordeeper has changed, or is in a position to change for a particular plan, then the only practical impediment to implementing any or all of the changes is (a) knowing what the employer wants to do, (b) communicating to employees, and (c) changing hardship request forms (paper or online). The first point, getting the employer's decision, can be handled in a variety of ways, e.g. a meeting or telephone conference with the employer in which an attorney takes notes and then summarizes the employer's decision, or a checksheet (like an adoption agreement page, but not formally an amendment) that the employer completes based on input of some sort (a face-to-face meeting, telephone conference, webinar with multiple clients) from the practitioner. You could also do a good faith interim amendment, voluntarily, if you like. The only risk I see with that is having to do a second one after the likely model amendment and final regs are out.

Communications to employees can be handled, again, in a variety of ways, e.g. a point-of-service communication to the employee at the time of the hardship request telling them how much is available and the sources of the funds. This would combine (b) and (c) above. I would guess that in almost all situations the employee doesn't care about this until they have a hardship and need the funds, and then they won't care about the source, just the amount available, so the idea that a statement in an SPD regarding the source of hardship distributions will be materially misleading to an employee seems unlikely to me. Nevertheless, updating the SPD with an SMM would be easy and avoid any risk of employees' not appropriately utilizing the plan's hardship provision.

Our document provider, ASC, sent out an update yesterday including an operational checklist.  The update says they will include the new hardship rules in a 2019 interim amendment and that it doesn't need to be adopted until the end of the 2019 year. The checklist is intended to be used to document employer decisions for plan operation prior to the interim amendment being adopted.

There you go.

Boy wouldn't it be grand if someone could share such a checklist on these boards there close friends :)

ftwilliam sent a similar comment in the form of a  Q and A

for example

Q:           When is an amendment required to the plan documents?

A:            The Proposed Regs state, “…if these regulations are finalized as they have been proposed, plan sponsors will need to amend their plans’ hardship distribution provisions.”  The Proposed Regs also state that all provisions of the final regulations will have the same amendment deadline.  It appears plan sponsors may rely on the Proposed Regs in operation prior to the plan being amended.  Although the Proposed Regs discuss timing of the amendments for individually designed plans, they are silent regarding amendments for pre-approved plans.  As such, it is unclear on the deadline for amending ftwilliam.com plan documents.  If or when the IRS provides additional information on amendments, we will send you an additional correspondence.

.................................................

I suspect if current plan allows hardships from all sources, then in operation you would now include the ability to take hardships from safe harbor sources in the future as well. if document indicated hardship from deferrals only then I would suspect you wouldn't want to include safe harbor in the future as well. whether you continue 6 month suspension for 2019 is your choice.

in other words your 'checklist' of how you are operating until amending the plan would simply come from the possible changes and a simply yes or no how you are operating in practice.

SEC. 41113. Modification of rules governing hardship distributions.

6 months suspension of deferrals after taking a hardship is eliminated (the revised regulations under this section shall apply to plan years beginning after December 31, 2018).

YES or NO for 2019

 

SEC. 41114. Modification of rules relating to hardship withdrawals from cash or deferred arrangements.

Section 401(k) is amended by adding a new section 14

(14) SPECIAL RULES RELATING TO HARDSHIP WITHDRAWALS.—For purposes of paragraph (2)(B)(i)(IV)—

(A) AMOUNTS WHICH MAY BE WITHDRAWN.—The following amounts may be distributed upon hardship of the employee:

(i) Contributions to a profit-sharing or stock bonus plan to which section 402(e)(3) applies (that is, a 401k plan).

(ii) Qualified nonelective contributions (as defined in subsection (m)(4)(C)). QNECs can be taken YES or NO - tis includes SHNECs

(iii) Qualified matching contributions described in paragraph (3)(D)(ii)(I). QMACs can be taken YES or NO this includes SHMACs

(iv) Earnings on any contributions described in clause (i), (ii), or (iii). Earnings are now includable

(B) NO REQUIREMENT TO TAKE AVAILABLE LOAN –(no longer required a participant must take a loan first before a hardship) YES or NO

 

 

Here is my concern regarding the implementation of part or all of these new rules: once a change would force a modification to the Safe Harbor notice the requirement to re-issue the Safe Harbor notice and delay the change for 30 days kicks in.  I think. Anybody agree?

Here’s some nonrule IRS explanations:

 

https://www.irs.gov/retirement-plans/notice-requirement-for-a-safe-harbor-401k-or-401m-plan

 

https://www.irs.gov/retirement-plans/mid-year-changes-to-safe-harbor-plans-or-safe-harbor-notices

 

These explanations don’t mention how to apply a rule, or even a Revenue Procedure’s tolerance, for a situation in which one administers a plan according to a “change” the sponsor and the administrator anticipate will later be expressed in a plan amendment.

 

Perhaps one way to interpret the Treasury department’s rule and the IRS’s nonrule guidance is to treat the date a sponsor or administrator decided to administer a plan according to an in-operation change as the date of the plan’s “amendment”.  If that decision date is before the change’s effective date, the plan’s administrator might furnish advance notice (as much as is “practicable”).

 

If an in-operation change’s effective date is immediate or less than 30 days after the decision date, the plan’s administrator might use a little flexibility in the times for the revised notice and the election opportunity.

 

This is NOT tax or legal advice to anyone.  And this does NOT reflect the advice I would give a client.

Huh?

Mike Preston, I agree with your observation that changing a 401(k) plan's hardship provision might require a revised safe-harbor notice.

We posed a number of questions to our major investment platforms and have a handful of responses back. You are correct that the IP's capability (or lack thereof) will greatly affect a TPA.

If, as the document sponsor/practitioner,  you intend to adopt an interim amendment in late 2019 or whenever it's finally required, with a retroactive effect to 1-1-2019, you will likely have a bunch of employers that will need to adopt their own provisions to override your interim amendment defaults.

Are you setting up tracking mechanisms now to internally monitor exactly which employers will not use your defaults and exactly which provisions they will need to manually adopt? Do you even know what you intend to do administratively for your own defaults? if not, you just might want to get started on that.

I completely agree with what Poje said earlier about "if the docs says all sources, then include all previously ineligible sources and if says deferral than its deferral only with no new sources."

That really should carry the day here and be a pretty universally acceptable approach.  I had certainly speculated that if I was a document provider writing an amendment that's certainly what I would write.  Which means nothing of course, but if Tom Poje would too, that means something!

Anything new on this in the past eight months?

 

If January 2020 arrives without the Treasury department having done anything (beyond publishing a proposed rule), is a plan's sponsor/administrator free to not change the plan, and not change its administration?

About those changes for which Congress directed the Secretary of the Treasury to make or change a rule but he has not done so, does Congress's Act require a plan's sponsor or administrator to do anything?

 

BenefitsLink furnishes the prepublication text of the Treasury’s final rule (scheduled to be published next Monday) about hardship distributions and related provisions.  https://benefitslink.com/news/index.cgi

 

In my quick glance, the Treasury’s explanation responds to the questions raised in the discussion above.  It also answers a few other questions.

 

Leaving aside thoughts about whether one likes or dislikes the rules, does the final rule sufficiently remove uncertainties?