As we all personally and professionally deal with the unknowns surrounding the COVID-19 pandemic and our efforts to minimize the spread of this virus, many of us may need financial assistance.  We want to remind you that a retirement plan is a long-term investment and before making any immediate changes you must consider the long-term effects.  Our government is working to develop plans to stimulate our economy and many in our local communities have already started efforts to help those in need. Understanding your 401(k) withdrawal and your options during this pandemic is very important.

Before we address what may or may not happen with additional relief efforts, let’s start by making sure we understand the laws in place today regarding distributions from retirement plans.

First, qualified retirement plans may, but are not required, to allow hardship distributions or loans.  If your Plan currently allows for hardships or loans, then the normal rules regarding maximum loans and hardships should continue to be followed unless the IRS releases additional guidance.   However, there may be more access than realized due in large part to the final hardship guidance that was released in 2019.

What are the current rules regarding hardship distributions?

In many cases you may already have access to most of your retirement account thanks to the guidance released by the IRS last year.  The additional guidance first allowed hardship withdrawals to be taken from a participant’s deferral account, including earnings, as well as from “safe harbor” or “QNEC/QMAC” accounts.  The amendment changing a plan’s hardship distribution provisions to take advantage of any of the new hardship rules does not need to be signed until 2021; however, the provisions can be retroactive as far back as 2019. 

If your plan document is supported by us, your plan’s distributions provisions are included in Section G.  Hardships are specifically addressed under question 3 and for many plans, only money from the deferral and rollover accounts may be listed as being available.  The new rules for the hardship amendment are not yet included in your plan document but a copy of the default amendment is available here and these rules override what is in your current adoption agreement.  We will be sending out the final hardship amendment later; it does not need to be signed until 2021.

What are the current rules regarding participant loans?

Currently, loans are allowed up to 50% of the participant’s vested account balance.  There have been times in the past where the IRS has increased this limit due to natural disasters; similar relief may be forthcoming.

Your plan’s current loan provisions can be found in your Loan Procedures document which is separate from your adoption agreement.

If you are unsure if your plan currently allows for loans and we support your plan document, please review your adoption agreement under Section G, question 14.

How long will it take to allow for distributions that are not available today?

Generally speaking, plan amendments must be executed before the distribution or loan occurs.  However, in the past, the IRS has provided relief to plan sponsors that allow hardship distributions or loans even if the plan does not otherwise provide for them.  This has been true for natural disasters such as hurricanes and tornadoes. It would be reasonable to assume that the IRS would provide relief for such distributions as a result of the novel coronavirus as well.

Our standard is to provide amendments and notices for these types of distributions within one week and we expect to maintain this timeline even if volumes increase.