Can a participant request a hardship distribution to cover income shortfall?

When enabled by plan design, hardship distributions are generally allowed if there is an “immediate and heavy financial need” as defined by the IRS, and the distribution is limited to an amount required to satisfy the need. Treasury regulations provide a safe harbor list of events that the IRS will deem a “heavy and financial need.” Most plans generally follow this list in their determination of eligible disbursement events.

These reasons do not generally cover the coronavirus-related events; for example, a hardship distribution cannot be made simply due to reduction of hours. Two potentially helpful hardship reasons are:

• Expenses to provide for medical care for the plan participant and the participant’s primary beneficiary under the plan
• Payments necessary to prevent the eviction of plan participant from his/her principal residence or foreclosure on the mortgage on that residence.

A new safe harbor provision added by the tax reform of 2017 could be helpful. This new “hardship reason” is available to a participant who lives in FEMA-declared disaster zone qualifying for individual assistance as designated by FEMA and incur expenses and losses (including loss of income) as a result of the disaster.

Although the President has declared a state of emergency for the COVID-19 pandemic, currently, only a handful of states (including Guam and Puerto Rico) have federal declared disaster status and not all qualify for individual assistance, so this option is not yet widely available.

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Cetera Retirement Plan Specialists is a third-party administrator and may not offer tax, legal or investment advice. Plan sponsors should consult their own tax, legal or investment professionals.