401(k) Hardship Withdrawals Can Help With Employees’ Coronavirus-Related Costs
Employers may be getting calls this week asking for ways they can financially assist employees in response to the current situation. As of the date of this Alert, Congress has yet to complete action on the paid sick leave bill.
One way that employers can assist employees faced with coronavirus-related costs and expenses today (no Congressional action or immediate employer action required) is that employers can permit employees to take hardship withdrawals from their 401(k) plan accounts to meet coronavirus-related expenses. The employee will still need to meet the requirement that the distribution be necessary to satisfy the financial need.
There are two possible mechanisms for permitting these hardship withdrawals:
Option 1. An employer can use the general standard under the IRS 401(k) regulations for hardship withdrawals by making a determination, based on the facts and circumstances, that the coronavirus-related costs represent an “immediate and heavy financial need.” This determination is based on all the facts and circumstances.
Option 2. The IRS recently modified the list of circumstances that are “deemed” to automatically qualify as an “immediate and heavy financial need” to add a category for expenses incurred as a result of a disaster declared by FEMA under the Stafford Act provided the employee’s residence or place of employment was in an area designated by FEMA for individual assistance with respect to the disaster.
This past Friday, President Trump declared a national emergency under the Stafford Act for all U.S. states, tribes, territories and the District of Columbia. An “emergency” declaration does not rise to the level of a “disaster” declaration that provides for individual assistance and thus does not qualify for the automatic designation. However, the emergency declaration noted that a subsequent disaster declaration is likely. Employers may wait for that subsequent declaration and act immediately upon issuance.
Of course, a volatile stock market is not the ideal time for an employee to withdraw amounts from a retirement plan; however, employers may still want to make this withdrawal option available. Employers will need to work with their 401(k) vendor to administer these alternatives.
If the employer’s 401(k) plan does not provide for Option 1 above, or has not been amended to add the disaster provision under Option 2 above (first permitted in 2018), the employer can amend the plan at any time during 2020. The plan does not generally need to be amended prior to implementing either provision.
This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.