When participants in a defined contribution retirement plan encounter urgent financial difficulties, they may consider hardship withdrawals as a last resort. The rules governing eligibility for these withdrawals vary depending on the criteria adopted by the plan sponsor. Understanding the distinctions between safe harbor, non-safe harbor, and more flexible criteria is key for both plan administrators and participants.
Safe Harbor Criteria
The safe harbor criteria provide a clear, standardized pathway for determining hardship withdrawal eligibility. If a plan sponsor elects to use the safe harbor method, they must follow Section 8.01(b) of the defined contribution base plan document.
- Plan Administrator’s Role: The Plan Administrator is responsible for determining whether the participant is experiencing an immediate and heavy financial need and confirming that the participant has no other resources available to meet this need.
- IRS Guidance: The Internal Revenue Service (IRS) considers the expenses listed in Section 8.01(b)(1) to automatically meet the safe harbor criteria. These often include medical expenses, costs related to the purchase of a primary residence, tuition and educational fees, payments to prevent eviction or foreclosure, funeral expenses, and expenses for certain home repairs.
- Certainty and Compliance: Plans that follow safe harbor criteria benefit from regulatory clarity, as these rules are directly aligned with IRS requirements.
Non-Safe Harbor Criteria
Non-safe harbor criteria offer an alternative for plans seeking greater flexibility in defining hardship withdrawals. If this approach is chosen, Section 8.01(c) of the defined contribution base plan document applies.
- Plan Administrator’s Role: Much like safe harbor, the Plan Administrator assesses whether an immediate and heavy financial need exists and whether the participant lacks other means to address the hardship.
- Flexible Evaluation: Unlike the rigid list under safe harbor, non-safe harbor allows the Plan Administrator to use broader, facts-and-circumstances-based judgment to determine what qualifies as a hardship, potentially accommodating unique situations not expressly outlined by the IRS.
- Regulatory Differences: Some provisions specified in the Final Hardship Regulations do not apply to non-safe harbor withdrawals. For example, there is no required six-month suspension of employee contributions following a hardship withdrawal, no obligation to take a plan loan first, and no requirement to strictly adhere to safe harbor financial need categories.
More Flexible Hardship Criteria
Plans may elect to further broaden their hardship withdrawal framework by adopting more flexible criteria for non-deferral accounts, but this option is only relevant when the safe harbor method has also been selected.
- Combined Approach: With this election, the Plan Administrator is permitted to make independent decisions based on the facts and circumstances of each case, in addition to applying the standard safe harbor criteria. This mirrors the flexibility found in non-safe harbor plans.
- Administrative Discretion: The intent is to allow the Plan Administrator to exercise judgment for situations that may not be explicitly covered by the safe harbor list, thereby addressing unique or unforeseen participant needs.
- Limitations: This flexible election does not replace the safe harbor standards but supplements them by expanding the range of qualifying hardships at the administrator’s discretion.
Impact of Final Regulations on Hardship Criteria
The final regulations simplified the Plan Administrators determination of meeting immediate and heavy financial need by requiring a standard three-part criteria to be used for all plans as of January 1, 2020. Only if all three criteria are met can the hardship be approved.
- The distribution is not in excess of the amount required to satisfy the financial need.
- The participant has obtained all other currently available distributions other than hardship and loans under all plans maintained by the employer.
- The participant has no other financial resources or assets reasonably available to satisfy the need.
Summary
In summary, safe harbor criteria offer a predictable and IRS-approved list of hardships, while non-safe harbor and more flexible criteria allow plan sponsors and administrators to adapt to individual circumstances. When using the non-safe harbor criteria, Plan Administrators should have a written procedure for reviewing and approving hardships based on a reasonable standard and uniform necessity criteria.