The Bipartisan Budget Act of 2018 (BBA) mandated changes to the 401(k) hardship distribution rules. Generally, these changes relax certain restrictions on taking a hardship distribution. For 2019, the changes are optional, but effective January 1, 2020, following issuance of final regulations, certain changes will be mandatory.

An employer may, but is not required to, provide for hardship distributions in their retirement plans. Many plans such as 401(k) plans, 403(b) plans, and 457(b) plans permit hardship distributions.

If a 401(k) plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship. Thus, for example, a plan may provide that a distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and education expenses. In determining the existence of a need and of the amount necessary to meet the need, the plan must specify and apply nondiscriminatory and objective standards.

The rules for hardship distributions from 403(b) plans are similar to those for hardship distributions from 401(k) plans.  If a 457(b) plan provides for hardship distributions, it must contain specific language defining what constitutes a distribution on account of an “unforeseeable emergency.”

Effective for hardship withdrawals made on or after December 31, 2018, IRS proposed regulations eliminate the mandatory requirement that a participant obtain all loans available under the plan and all other plans maintained by the employer. Such a restriction is now an optional provision that may be adopted by the employer. The requirement that a participant must first obtain available distributions under all other plans maintained by the employer, (whether qualified or nonqualified) before receiving a hardship withdrawal remains in place.

Hardship distributions from a 401(k) plan were previously limited to the amount of the employee’s elective deferrals and generally did not include any income earned on the deferred amounts. The proposed regulations permit, but do not require, 401(k) plans to allow hardship distributions of elective contributions, QNECS, QMACS, and safe harbor contributions and earnings on these amounts regardless when contributed or earned. The change can be made as of January 1, 2019.

The proposed regulations also make it optional for 2019 to prohibit an employee from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution. Under the proposed regulations effective January 1, 2020, the 6-month suspension from making elective contributions is no longer allowed.

Prior to the issuance of the proposed regulations there were no special rules for hardship distributions on account of hurricanes or other natural disasters. The proposed regulations modify the safe harbor list of expenses for which distributions are deemed to be made on account of an immediate and heavy financial need by adding a new type of expense to the list, relating to expenses incurred as a result of certain disasters.

Finally, the proposed regulations incorporate guidance provided under the Pension Protection Act of 2006 by providing that qualifying medical, educational, and funeral expenses relating to a participant’s primary beneficiary may qualify as expenses eligible for a hardship withdrawal.

A review of these changes would indicate that employers should not wait until 2020 to make these changes because they represent opportunities for employers to simplify plan administration in areas where administrative mistakes often occur.

Plan participants should ask their employers about the implementation and timing of these changes so they can adjust their financial plans accordingly.




The Internal Revenue Service has added care for a range of chronic conditions to the list of preventive care benefits that may be provided by a high deductible health plan (HDHP). Notice 2019-45 (PDF) lists the new types of medical care that may be treated as preventive care for this purpose.

Individuals covered by an HDHP generally may establish and deduct contributions to a Health Savings Account (HSA) as long as they have no disqualifying health coverage. To qualify as a high deductible health plan, an HDHP generally may not provide benefits for any year until the minimum deductible for that year is satisfied.  However, an HDHP is not required to have a deductible for preventive care (as defined for purposes of the HDHP/HSA rules).

The Treasury Department and the IRS, in consultation with the Department of Health and Human Services, have determined that certain medical care services received and items purchased, including prescription drugs, for certain chronic conditions should be classified as preventive care for someone with that chronic condition. The list of chronic conditions include diabetes, hypertension, congestive heart failure, asthma, osteoporosis, liver disease, heart disease and liver failure.

These medical services and items are limited to the specific medical care services or items listed for the associated chronic conditions specified in Notice 2019-45. Any medical care previously recognized as preventive care for these rules is still treated as preventive care.