The Bipartisan Budget Act of 2018 and the Tax Cuts and Jobs Act of 2017 liberalized the hardship distribution rules applicable to 401(k) and 403(b) plans. On September 23, 2019, the IRS issued final regulations — which we discussed in a previous blog — implementing the new hardship distribution rules. While some of the new rules were discretionary, there are several mandatory provisions that will take effect on January 1, 2020, including:

• Plans are prohibited from suspending employee deferral contributions following hardship distributions that occur on or after January 1, 2020; and

• Employees must represent in writing (including electronic representations) that they have insufficient cash or other liquid assets reasonably available to satisfy the need giving rise to hardship distribution requests that are made on or after January 1, 2020.

On December 12, 2019, the IRS issued Rev. Proc. 2020-9, clarifying when 401(k) plans must be amended to comply with the elimination of deferral suspension and written representation rules described above: December 31, 2021 for both individually designed and pre-approved 401(k) plans, which aligns with the deadline the IRS established for non-governmental 403(b) plans in Rev. Proc. 2019-39.

Key Takeaway: Although plan documents do not need to be amended immediately, plan sponsors should ensure that they are in operational compliance with all mandatory hardship distribution rules that become effective on January 1, 2020.

On September 23, 2019, the Treasury Department and IRS published final regulations for hardship distributions from both 401(k) and 403(b) plans (the “Final Regulations”).  Essentially the hardship distributions changes relax the hardship distribution requirements (i.e., making it easier for participants to obtain hardship distributions) and eliminate many burdens following a hardship distribution (i.e., allowing participants the flexibility to contribute to their retirement plan account shortly after obtaining a hardship distribution).

The Final Regulations respond to comments on the earlier proposed regulations issued in November 2018 (see our previous blog here).  As expected, the Final Regulations closely mirror the proposed regulations.  So, any 401(k) or 403(b) plans amended to comply with the proposed regulations will most likely satisfy the Final Regulations.

The Final Regulations make the following required and permissive changes to the hardship distribution requirements:

  • Elimination of 6-Month Suspension – The Final Regulations remove the 6-month suspension rule which prevents participants who have taken hardship distributions from contributing to the plan for 6 months following the hardship distribution.
    • This is a required change on or after January 1, 2020, but a plan may elect to remove the 6-month suspension requirement as early as January 1, 2019.
  • Expansion of Available Hardship Sources to include elective contributions, QNECs, QMACs, safe harbor contributions, and earnings – The Final Regulations remove the restriction against hardship distributions from qualified non-elective contributions (QNECs), qualified matching contributions (QMACs), earnings on these amounts, and earnings on elective contributions no matter when contributed or earned.  But for Section 403(b) plans, the Final Regulations only permit hardship distributions on qualified non-elective contributions (QNECs) and qualified matching contributions (QMACs) that are not in a custodial account (i.e., they are held in an annuity).  For 403(b) plans, earnings on elective deferrals remain ineligible for hardship withdrawal.
    • This is a permissive change. 
  • Elimination of the Plan Loan Requirement – The Final Regulations remove the requirement that participants take all available plan loans before taking a hardship distribution (although participants still must exhaust all other in-service withdrawals available under the plan).
    • This is a permissive change.
  • Creation of a General Financial Need Standard – The Final Regulations eliminate the rule under which the determination of whether a distribution is necessary to satisfy a financial need is based on all the relevant facts and circumstances and provide one general standard for determining whether a distribution is necessary to satisfy an immediate and heavy financial need.  Under this general rule, (1) a hardship distribution may not exceed the amount of the need, (2) the employee must have obtained other available distributions under the employer’s plans, and (3) the applicable employee must represent (in writing, electronically, or in another form permitted by the IRS) that he/she has insufficient cash or other liquid assets to satisfy the immediate and financial need for which the hardship is being sought.  The Final Regulations provide that a plan may provide additional conditions for employees to demonstrate that a distribution is necessary to satisfy an immediate and heavy financial need; however, the Final Regulations do not permit a suspension of elective contributions or employee contributions as a condition of obtaining a hardship distribution.
    • This is a required change for hardship distributions on or after January 1, 2020, and may be a permissive change for hardship distributions as early as of January 1, 2019.
  • Creation of New Safe Harbor Circumstance for Immediate and Heavy Financial Need – The Final Regulations expand the situations deemed to create an “immediate and heavy financial need” to include expenses and losses incurred by the employee because of a federally declared disaster, if the employee’s principal residence or place of employment was in the disaster area at the time of the disaster.  Of note, there is no deadline by which a disaster-related hardship distribution must be made following the federal disaster.
    • This is a permissive change. 
  • Expansion of Safe Harbor Circumstances for Qualified Beneficiary Expenses – The Final Regulations expand the safe harbor circumstances to include qualifying medical, educational, and funeral expenses for a participant’s “primary beneficiary under the plan” (i.e., an individual named as beneficiary under the plan that has an unconditional right upon the participant’s death, to all or a portion of the participant’s account balance under the plan)
    • This is a permissive change. 
  • Clarification of Safe Harbor Circumstances for Casualty Loss Reason – The Final Regulations provide clarification that home casualty losses (under Code Section 165) do not have to be tied to a federal disaster to be eligible for a hardship distribution.
    • This is a permissive change.

Please contact your preferred Jackson Lewis attorney for assistance applying the Final Regulations to your plan and preparing or reviewing necessary amendments.

Earlier this year we reported on legislative changes that modified the requirements related to hardship distributions from 401(k) plans.  Recently, the IRS issued proposed regulations that if finalized will implement those changes.


The Internal Revenue Code (the “Code”) and associated regulations generally place restrictions on participants’ ability to withdraw their elective deferrals from 401(k) plans.  Similar restrictions exist for Section 403(b) plans.

However, there are exceptions to those rules.  One such exception occurs if the plan allows for hardship distributions.  A hardship distribution is a distribution that a participant can take under certain circumstances of immediate and heavy financial need.  A hardship distribution can be taken only if it is necessary to satisfy that need.  Immediate and heavy financial needs include things like certain medical care expenses, the cost to purchase a principal residence, certain tuition and educational expenses, the amount necessary to avoid eviction, certain burial or funeral expenses, and certain expenses to repair damage to a principal residence.

Elective Deferral Restrictions Following a Hardship Distribution

Under current IRS regulations, participants that take hardship distributions generally are not allowed to contribute to the plan for a six-month period following the hardship distribution.  The proposed regulations would remove the six-month suspension rule for hardship distributions that occur on or after January 1, 2020.  In other words, as of that date, plans cannot contain the six-month suspension rule.

The plan would be allowed (but not required) to eliminate the six-month suspension rule as of the first day of the plan’s 2019 plan year.  The removal could be applied retroactively to those who took hardships prior to that date but are still in the six-month suspension period.

Prohibition on Hardship Distributions of Elective Deferral Earnings, QNECs and QMACs

The proposed regulations would remove the rule that prevents hardship distributions from elective deferral earnings, qualified non-elective contributions (QNECs) and qualified matching contributions (QMACs).  This is not a required change, so plan sponsors have the discretion to determine whether and to what extent to adopt these changes.

Section 403(b) plans are more limited in the changes that can be made.  Specifically, a Section 403(b) plan cannot eliminate the restriction preventing hardship distributions from elective deferral earnings, and hardship withdrawals of QNECs and QMACs are only allowed if those amounts are not held in custodial accounts.

Elimination of Plan Loan Exhaustion Requirement

In accordance with changes in the tax laws, the proposed regulations remove the requirement that participants take all available plan loans prior to taking a hardship distribution.  This is a permissive change that plans can adopt for the 2019 plan year and beyond.

Substantiation Requirements

The proposed regulations would require that for hardship distributions that occur on or after January 1, 2020, the applicable employee must represent (in writing, electronically or in another form permitted by the IRS) that he or she has insufficient cash or other liquid assets to satisfy the immediate and financial need for which the hardship distribution is being sought.  The plan administrator would be allowed to rely on this representation absent actual knowledge to the contrary.

Other Changes

As noted above, hardship distributions are only allowed in certain circumstances of immediate and heavy financial need, one of which is for expenses to repair damage to a principal residence that qualifies for a casualty deduction under the Internal Revenue Code.  Recent changes in the tax limit the casualty deduction to expenses related to certain federally declared disasters (through 2025), with the unintended consequence of limiting the situations in which a participant could qualify for a hardship distribution due to home damage.  The proposed regulations would clarify that the new limit on casualty loss deductions would not apply for purposes of hardship distributions.

In addition, the proposed regulations would expand the situations deemed to create an immediate and heavy financial need to include expenses and losses incurred by employees because of a federally declared disaster, if the employee’s principal residence or place of employment was in the disaster area at the time of the disaster.

Plan Sponsor Considerations

Plan sponsors may want to communicate with their third-party record keepers and document providers regarding changes in hardship distribution procedures.  Many employers use volume submitter or prototype plan documents, and many of those document providers are making default changes to the hardship rules of those plans.  Employers may need to determine whether they want to use the provider’s default changes or do something different.  Similarly, sponsors of individually designed plans may also want to speak with their third-party administrators about any changes being contemplated.

The exact date that plan amendments will be required to implement the changes described above is not yet known.  Generally, however, amendments will be required by the end of the second calendar year beginning after the IRS issues its annual “Required Amendments List” that includes changes in the hardship rules.

Plan administrators may also want to consider whether updates are needed to the plan’s summary plan description and other communications documents that describe the plan’s hardship rules, and to election forms and online election pages.

Please contact your preferred Jackson Lewis attorney for assistance in understanding these new rules and how they may affect your plan.

Just a few weeks ago, the federal government avoided a potentially lengthy government shutdown when Congress passed and the President signed into law the Bipartisan Budget Act of 2018 (the “Act”). You may already know that the Act extends funding for the federal government until March 23, 2018. However, what you may not know is that hidden in the Act are provisions that will change some of the rules relating to hardship distributions from 401(k) plans.

Hardship Distributions from 401(k) Plans

The Internal Revenue Code (the “Code”) and associated regulations place restrictions on participants’ ability to withdraw their elective deferrals from 401(k) plans except in certain circumstances (e.g., reaching age 59 ½; termination of employment). One such exception is that a 401(k) plan is allowed to provide for “hardship distributions.” This means that in certain circumstances (and if the plan allows), an active employee participating in a 401(k) plan can withdraw his or her elective deferrals to pay for certain expenses.
Section 401(k) of the Code and the regulations thereunder place a number of rules and restrictions on hardship distributions. For instance, the distribution must be on account of hardship, meaning that it is pursuant to an immediate and heavy financial need and is necessary to satisfy that need. Immediate and heavy financial needs include things like certain medical care expenses, the cost to purchase a principal residence, certain tuition and educational expenses, the amount necessary to avoid eviction, certain burial or funeral expenses, and certain expenses to repair damage to a principal residence.

An employee that takes a hardship distribution is generally prohibited from making elective deferrals to the plan (or any other plan maintained by the employer) for at least 6 months following the hardship distribution. Also, hardship distributions are only permitted from certain accounts. Except for certain grandfathered amounts, they cannot be taken from the participant’s income on elective deferrals, qualified nonelective contributions (“QNECs”) or qualified matching contributions (“QNECs”). Furthermore, before a hardship distribution can occur, the employee must have taken all other available distributions from the plan (and other plans maintained by the employer), such as a loan (if available).

What Changes Does the Act Make to Hardship Distributions?

First, the Act will eliminate the 6-month suspension on elective deferrals following a hardship distribution. It requires the Secretary of Treasury to issue regulations removing the 6-month restriction on elective deferrals. The Secretary has up to one year to complete this task. Furthermore, the Act amends Section 401(k) of the Code to allow for hardship distributions to include QNECs, QMACs, and income on elective deferrals. Lastly, the Act removes the requirement to take available loans before taking hardship distributions. These changes are effective for plan years beginning after December 31, 2018.

What Should Plan Sponsors Do?

Be on the lookout for new regulations and guidance from the Secretary of Treasury, and contact the Jackson Lewis attorney of your choice for assistance. We can help you amend your plan document, and also work with you and your third-party administrators to implement the administrative changes needed for 2019. If your plan does not currently provide for hardship distributions, but you would like to add that option, we can help you with that too.

On February 23 and March 7, 2017, the Internal Revenue Service (“IRS”) issued memoranda to examination agents addressing review of substantiation provided in support of safe harbor hardship distributions under 401(k) and 403(b) plans. Although the memoranda cannot be relied upon as official guidance, they are good reference points to help plan sponsors and third party administrators (“TPAs”) avoid issues on audit.

Hardship Distributions

401(k) and 403(b) plans may allow hardship distributions on account of immediate and heavy financial need of an employee that cannot be satisfied from other sources, including plan loans. The Treasury Regulations provide a safe harbor for certain distributions that — if properly substantiated — will be deemed to be on account of an immediate and heavy financial need, including:

• medical care for the employee or the employee’s spouse, children or dependents;
• purchase of a principal residence;
• payment of tuition, related educational fees, room and board expenses for up to the next 12 months of post-secondary education for the employee or the employee’s spouse, children or dependents;
• payments necessary to prevent eviction of the employee from the employee’s principal residence or foreclosure of the mortgage on that residence;
• payments for burial or funeral expense for the employee’s deceased parents, spouse, children or dependents; or
• expenses for the repair of damages to the employee’s principal residence that would qualify for a casualty deduction.

Memoranda Guidance

In reviewing safe harbor hardship distributions, auditors will review source documents — such as estimates, contracts, bills and statements from third parties — or a summary of the information contained in the source documents. The memoranda’s reference to review of a “summary of information” seems to contemplate — and signal tacit approval of — electronic or streamlined hardship distribution processes, pursuant to which requests do not include submission of source documents, but rather require only the employee’s certified representation concerning the content of, and a promise to preserve, the source documents.

Summary of Information

In order to avoid potential unpleasantries on audit, plans that use an electronic or streamlined hardship distribution request process will need to take certain steps. First, the employer or TPA must provide the employee notice that, inter alia, the distribution is taxable, cannot exceed the immediate and heavy financial need, cannot be made from earnings on elective deferrals and — perhaps most importantly — the employee must agree to preserve the underlying source documents and make them available at any time upon request of the employer or TPA. Second, the summary of information must include, at a minimum, the information specified in the memoranda required to substantiate the hardship distribution in question — for example, a hardship distribution request for funeral expenses should include the name of the deceased, the deceased’s relationship to the employee, the date of death and the name and address of the service provider of the funeral or burial. Third, if a TPA administers hardship distributions, it should provide a report to the employer at least annually that describes the hardship distributions made during the year.

Where a summary of information is incomplete or inconsistent on its face, the auditor may ask the employer or TPA for the source documents. In addition, where an employee has received more than two hardship distributions in a plan year, in the absence of adequate explanation — such as follow-up funeral expenses — and with IRS managerial approval, the auditor may ask to review source documents.

Recommended Next Steps

Review your plan’s hardship distribution procedures and, if applicable, confer with your TPA to ensure compliance with the memoranda. Although the memoranda cannot be relied upon as binding authority, conforming your hardship distribution procedures should go a long way to helping you complete a successful hardship distribution audit.

If you ask, plan administrators will tell you that for every deadline or specified time limit that is imposed by law upon plan participants for taking action with respect to an employee benefit plan, there are always a significant number of participants who come forward with one or more “excuses” why they could not meet the deadline. Often these “excuses” are legitimate. However, only occasionally is there a legally authorized protocol provided to plan administrators and participants which can remedy the circumstance of the missed deadline. Such an occasion occurred on August 24, 2016.

In Rev. Proc. 2016-47, the IRS published guidance to assist participants who, because of certain circumstances of hardship, miss the 60-day deadline for rolling over qualified retirement plan or IRA assets and, without a legally authorized excuse, would otherwise be required to pay additional taxes due on early distributions. Even better, the IRS set forth a protocol for participant “self-help,” which permits plan administrators to accept transfers of plan assets after the 60-day deadline has passed.

The reasons the IRS deems to provide legitimate excuse for missing the 60-day deadline are, in summary:

a) An error by the financial institution in receiving a contribution or distributing assets relating to a contribution;
b) The distribution made by check was lost and not cashed;
c) The distribution was inadvertently deposited to, and left in an account the participant believed was, an eligible retirement plan, but was not;
d) The participant’s residence suffered severe damage;
e) There was a death in the participant’s family, or a serious illness;
f) The participant was incarcerated;
g) A foreign country imposed a restriction which delayed deposit of the participant’s plan assets;
h) There was a delay caused by the postal service;
i) The plan assets intended to be distributed were levied by the IRS, and the IRS later returned the plan assets to the participant; or
j) The distribution of plan assets and the rollover were delayed due to the failure of the distributing party to provide the information needed by the recipient plan or IRA, despite the participant’s “reasonable efforts” to obtain the information.

See Rev. Proc. 2016-47.

A plan participant who has received a prior IRS determination that it will not waive the 60-day time limit as to a particular distribution event is not eligible for the “self-help” offered by Rev. Proc. 2016-47. Otherwise, however, the participant may write a “certification” to a plan administrator or IRA trustee that the participant’s excuse for missing the 60-day deadline for depositing distributed plan assets into another tax-qualified retirement plan or IRA fits within the conditions that permit such delay to be excused as set forth in Section 3.02 of Rev. Proc. 2016-47. The plan administrator or IRA trustee may rely upon such certification, unless the plan administrator or trustee possesses knowledge that the facts recounted in the certification are not accurate or are untrue.

The plan participant may also rely upon the certification in taking a tax position on the participant’s individual tax return. On examination, however, the IRS has authority to challenge the position taken by the participant based upon the written certification. The IRS also has the ability to determine other statutory or regulatory grounds exist that support a waiver of the 60-day rollover time limit.

A plan participant who desires to take advantage of the “self-help” procedure contained in Rev. Proc. 2016-47 can find the IRS’s preferred form for certification, the “Certification for Late Rollover Contribution,” attached as an appendix to the Rev. Proc. Participants who desire to rely upon the certification are advised to deposit their distributed plan assets into an eligible retirement plan or IRA “as soon as practicable” after the event which caused the deposit delay has resolved. As an express “safe harbor,” the participant who makes the deposit within thirty (30) days of resolution of the event that caused the delay described in the certification will be deemed to have made such deposit “as soon as practicable” within the meaning of Rev. Proc. 2016-47.

On March 29, 2022, the House of Representatives passed the Securing a Strong Retirement Act of 2022 (SECURE 2.0, HR 2954).  SECURE 2.0 is a comprehensive bill designed to increase access to retirement savings and includes a variety of provisions that would affect employer-provided retirement plans.

On June 14, 2022, the Senate Health, Education, Labor, and Pensions (HELP) Committee unanimously approved its version of SECURE 2.0, the Retirement Improvement and Savings Enhancement to Supplement Health Investments for the Nest Egg (RISE and SHINE, S. 4354) Act.


The RISE and SHINE Act builds on SECURE 2.0, with some key differences.  Provisions in the RISE and SHINE Act not in SECURE 2.0 include:

  • Allowing the use of plan assets to pay some incidental plan design expenses;
  • Raising the limit on mandatory cash-out distributions from $5,000 to $7,000; and
  • The inclusion of the Emergency Savings Act of 2022 (the Emergency Savings Act). Under Emergency Savings Act, 401(k) plans could include emergency savings accounts.  Participants could make pre-tax contributions to their emergency savings accounts.  Employers could match those contributions, but the total amount in a participant’s emergency savings account could not exceed $2,500.  Participants could withdraw amounts from their emergency savings accounts generally at any time, without the requirements imposed on hardship withdrawals.

Provisions in SECURE 2.0 not in RISE and SHINE include:

  • Increasing the catch-up contribution limit;
  • Permitting matching contributions on student loan payments; and
  • Raising the required minimum distribution age.


The Senate Finance Committee anticipates releasing its retirement reform bill by July 4.  The expectation is for the Finance Committee bill and the HELP Committee bill to merge into a final bill, which the Senate will vote on later this year.  The Senate bill will then be reconciled with SECURE 2.0, and both chambers will vote on the combined bill.

We will continue to monitor retirement reform bills as they move through Congress and will have additional updates as information becomes available.  Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

As COVID-19 continues its upheaval of nearly all aspects of life, retirement plan administration included (see some of our prior discussions here, here, here and here), the Internal Revenue Service recently issued guidance providing additional relief for the sponsors of certain plans.  IRS Notice 2020-52 clarifies requirements for mid-year changes to a safe harbor 401(k) plan that only reduces contributions made on behalf of highly compensated employees (HCEs), and provides temporary relief from certain requirements that would otherwise apply when a plan sponsor chooses to reduce or suspend safe harbor contributions during a plan year.

Contributions and benefits provided under a qualified retirement plan must not discriminate in favor of HCEs.  Certain tests must be run on a plan annually —the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests—to confirm that a plan is non-discriminatory.  Sponsors may instead choose to design their plan as a “safe harbor” plan by providing matching or nonelective contributions to non-HCEs under certain formulas specified under the safe harbor rules.  By doing so, a plan is generally deemed to pass the ADP and ACP tests.  In most cases, the safe harbor provisions of a plan must be adopted before the first day of a plan year and must remain in place for the entire 12-month period that follows.  If a sponsor does wish to make changes during a plan year—in particular, amending the plan to reduce or suspend the safe harbor contributions—they must either be operating at an economic loss or have included language in their annual safe harbor notice that a reduction or suspension may occur mid-year with 30 days’ advance notice.

The IRS recognizes, however, that many plan sponsors are facing unexpected and unprecedented financial hardship this year in light of COVID-19.  Sponsors may not know yet whether they are operating at an economic loss for the year and/or may not have included the requisite language regarding potential changes in their most recent safe harbor notices.  Sponsors may also have difficulty satisfying the timing requirements for suspending safe harbor contributions when doing so immediately is necessary to ensure they can meet their payroll and other financial obligations.

Because of these considerations, Notice 2020-52 clarifies that a mid-year amendment only reducing contributions to HCEs is not a safe harbor contribution change (as safe harbor contributions by definition are only made to non-HCEs), though an updated safe harbor notice is still required.  In addition, a plan may be amended to reduce or suspend safe harbor contributions between March 13, 2020, and August 31, 2020, without requiring economic loss or language in the annual safe harbor notice allowing such a mid-year change.  Such an amendment, regarding nonelective contributions only, may also be made without 30 days’ advance notice, as long as the amendment is effective on a prospective basis and an updated safe harbor notice is provided no later than August 31, 2020.  (Thirty days’ advance notice is still required for changes to safe harbor matching contributions as those contributions may directly affect the amount a participant chooses to defer.)

The relief under Notice 2020-52 also applies to safe harbor 403(b) plans.

If you have questions regarding Notice 2020-52, or any other COVID-19 relief afforded to qualified retirement or other benefit plans, please contact a member of our Employee Benefits practice group.

Since March 27, 2020 when the CARES Act was signed into law, many questions have mounted related to implementing the retirement plan provisions.  Now, with roughly 3 months under our belts since the issuance of the Act and countless CARES Act distributions and loan suspensions processed, the IRS clarified several eligibility, administrative, and taxation reporting rules by issuing IRS Notice 2020-50.  The Notice provides safe harbors, a model certification, and information reporting codes.  It is a must-read for those responsible for administering employer-sponsored retirement plans.  We discuss the basics of the CARES Act in an earlier article.

Coronavirus-Related Distributions

The CARES Act authorized eligible retirement plans to offer for a limited time a new type of distribution, a Coronavirus-Related Distribution (CRD), which is afforded special tax treatment.  Only Qualified Individuals (QI) are eligible for a CRD.  Significantly, the Notice expands the definition of a QI under Section 2202 of the CARES Act to include individuals whose:

  • Pay was reduced because of COVID-19, including self-employment income;
  • Job offer was rescinded or postponed;
  • Spouses’ or other household members (someone who shares the individual’s principal residence) experience a COVID-19 related adverse financial consequence, including the closing or reducing of hours of a business they own and operate.

The CARES Act allows employers to rely on an employee’s certification, barring any actual knowledge to the contrary, of being a QI when requesting a CRD.  Administrators do not have a duty to investigate.  Instead, actual knowledge is present only when the administrator already knows facts to determine the truthfulness of the certification.  The Notice provides sample language of an acceptable certification for employers and individuals to use for documentation.

The Notice clarifies the types of distributions that qualify as CRD, noting that even distributions to beneficiaries, required minimum distributions, and plan loan offset amounts can qualify.  A QI may consider a distribution to be a CRD for personal tax reporting even if the plan does not.  But the Notice explicitly excludes certain distributions from designation as a CRD, including:

  • Corrective distributions of elective deferrals;
  • Loans treated as deemed distributions;
  • Dividends on employer securities;
  • Distributions from an eligible automatic contribution arrangement.

The Notice also clarifies that an employer may expand options for CRDs to include sources that ordinarily are not permitted without a distributable event or reaching age 59 ½.  Examples of these sources include qualified nonelective or qualified matching contributions.  However, the Notice reminds employers that the CARES Act does not change the distribution rules normally applicable to plans, noting for example that pension plans and money purchase pension plans cannot permit distributions before a permissible distribution event, even if it would qualify as a CRD.

Unlike other need-based distributions, e.g., hardship distributions, the amount a QI requests as a CRD need not correspond to an actual amount of need.  But the eligible retirement plan and any related plans are limited to an aggregate amount of $100,000 for a CRD to anyone QI.

CRDs are not subject to the 10% early withdrawal penalty, reportable as gross income over 3 years and most may be recontributed and treated as a rollover contribution over a 3-year period to an eligible retirement plan that accepts rollovers.  Notice 2020-50 clarifies how to treat a CRD for tax purposes and provides specific codes an administrator should use in box 7 of the Form 1099-R.

Recontributions of CRD

A QI may recontribute a CRD as a rollover contribution over 3 years to an eligible retirement plan that accepts rollovers.  The Notice explains how a CRD may be recontributed, even for distributions not normally eligible for rollover.  The Notice identifies one situation, any CRD paid to a QI as a beneficiary of an employee, where a QI may not recontribute a CRD.  The employer may also rely on the individual’s certification of satisfaction of the QI requirements when determining the status of a CRD as eligible for recontribution.

A plan that does not accept rollovers need not accept recontributions of CRDs.  Instead, the decision of whether to amend a retirement plan to implement these CARES Act provisions is at the discretion of the employer.


Among other plan loan changes, the CARES Act allows certain loan repayments due by QI to be suspended.  The Notice provides a safe harbor for implementing these plan loan suspension rules.  The safe harbor applies if the loan is re-amortized after the suspension period (which must not end later than December 31, 2020) over the remaining period of the loan plus 1 year.  Interest accruing during the suspension period must be included in the re-amortized payments.

The Notice acknowledges there are other reasonable, and perhaps more complicated, ways to implement the CARES Act plan loan suspension provisions.  The safe harbor is not the only option available.

Required Minimum Distributions

The SECURE Act raised the beginning age for Required Minimum Distributions from 70 ½ to 72.  The CARES Act waived the requirement that an individual receive the distribution in 2020.  Individuals may elect to not receive their Required Minimum Distribution in 2020.  The Notice provides that a QI eligible to receive a Required Minimum Distribution may elect to receive the distribution and consider it a CRD on their individual tax return, which would allow the individual to include the amount in gross income over 3 years.  But these distributions are not eligible for recontribution into an eligible retirement plan.

Cancellation of 409A Deferral Elections

The adverse financial effects of the COVID-19 pandemic have not been limited to only certain factions of the workforce.  The Notice acknowledges that those participating in nonqualified deferred compensation plans also may experience financial challenges.  It provides that an individual qualifying for a CRD will be treated as having received a hardship distribution for purposes of the regulations implementing Section 409A of the tax code, enabling service providers to cancel nonqualified deferred compensation plan deferral elections if the plan so permits.

We are available to help plan administrators understand the new guidance.  Please contact a team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

With the combination of our nation’s response to COVID-19 and the resultant economic downturn, employers of all sizes face the moral and financial dilemma of evaluating employee headcounts while businesses are grappling with the reality of the current situation.  Many employers are considering furloughs, or other types of approved leaves of absences, to reduce immediate payroll, hoping the downturn lasts for a period of a few weeks instead of months. Other employers are opting to implement systemic reductions in the workforce and let employees go.  The focus of this article is to highlight that different employment actions produce different employee benefits consequences that must also be part of any employment decision.

No general rules apply to every situation, as all circumstances are somewhat unique.  Below is a list of several key issues employers must consider as they evaluate their employee benefits programs with an eye toward reducing payroll costs:

  • Don’t assume coverage continues during leaves or furloughs or automatically ends immediately upon termination of employment. Plan terms typically dictate whether active coverage can continue during short-term leaves of absence, whether paid or unpaid, and many plans have minimum hour requirements to maintain active coverage.  Employers that expand coverage for ineligible employees outside the terms of the plan or policy without consent from the insurer or stop loss carrier face significant financial exposure.
  • COBRA continuation coverage (or state continuation coverage, if applicable) generally must be offered for all group health plans when there is a loss of coverage because of a termination of employment or reduction in hours. An increase in the employee’s share of the premium because of his or her reduction in hours (including to zero, as in a furlough) is a loss of coverage for this purpose.
  • The Affordable Care Act employer penalty should be considered. Terminating the group health plan coverage for an employee when a leave or furlough begins may cause an ACA penalty for failing to offer coverage to 95% of full-time employees.  And the coverage offered must remain affordable to avoid an ACA penalty, which may require a continued or increased employer subsidy, whether on active or COBRA coverage.
  • Plan for how employees will keep paying monthly premiums/contributions to maintain coverage during any leave period. Failure to pay monthly premiums could cause coverage to lapse without COBRA protections for health, dental and vision plans, invalidate future Health FSA and Dependent Care FSA claim reimbursements and could also trigger obligations to reinstate life and other disability plan arrangements only through evidence of insurability.  Arrangements should be made in advance with employees about how they will keep contributing to any allowable coverage during leave, whether through a COBRA vendor, ACH payment from a personal checking account or by mail.
  • Before taking any employment actions, the employer should first determine whether it maintains or maintained any formal or informal severance plan or policy that provides a precedent for what benefits may be offered to terminated employees.
  • 401(k) and other retirement plan implications must be considered. A reduction in force, layoff or furlough could cause a “partial termination” under a 401(k) or other retirement plan rules, which triggers 100% vesting for affected participants.   Review hardship and other distribution provisions, and make sure plan loan provisions are reviewed and followed so that “deemed distribution” consequences may be avoided.  Service credit for vesting and employer contributions can also still be required during leaves or breaks in service.  “Safe harbor” match or other fixed contribution provisions should be suspended only after considering the potential ramifications and taking the required implementation measures. Employers should be vigilant in maintaining the same payroll deposit schedule for employee salary deferrals.
  • Employers should review all deferred compensation agreements and other employment agreements for any leave or termination impact. Such agreements may have short-term bonus payouts or other incentive payment obligations due to any “termination without cause” or other “separation from service” that cannot be altered without a review of all implications of Section 409A of the Tax Code. These rules generally prohibit employees from making salary deferral election changes mid-year (including canceling elections) and/or changing the timing of payments.

This is by no means an exhaustive list of all issues to consider before final decisions are made related to any short-term or long-term reduction in employee payroll.  Each employer must evaluate the issues to find the best options during these challenging times.  Please contact any of our Employee Benefit attorneys to help evaluate the issues based on your specific factual circumstances and plan designs.