The new law in late 2022 known as SECURE 2.0 made numerous changes to retirement plans including the process for an employee to receive a “hardship withdrawal”.
Although 401k and 403b Plans are intended to provide savings for retirement, the IRS permits a Plan to allow for hardship withdrawals, which are employee withdrawals before retirement to pay for certain significant or life-changing expenses, such as the purchase of a home, prevention of eviction from a rented residence or foreclosure on a home mortgage, to pay college tuition, or for medical expenses.
The hardship review and approval process has historically put the employer and those administering the Plan – the “fiduciaries” of the Plan – at risk because they have been responsible for ensuring there is sufficient proof that the purpose of the withdrawal exists and that the amount requested is necessary to satisfy that purpose.
If the employer allows hardship withdrawals, SECURE 2.0 now permits the Plan to rely on a certification by the employee that the distribution is:
(i) on account of a financial need permitted by IRS regulations; and
(ii) not in excess of the amount required to satisfy such financial need, and that the employee has no alternative means reasonably available to satisfy the need.
In other words, it no longer is necessary for the “fiduciaries” to review proof of the reason and the amount.
It is the recommendation of ACSI that Plans which allow hardship withdrawals should use self-certification. We do recognize that there is the potential that the employee may not understand the rules or may “push the envelope” when self-certifying, but eliminating the burden of evaluating the employee’s proof, and the accompanying risk to the employer, outweighs this concern.
As with most of the SECURE 2.0 changes, the industry is continuing to work on implementation. At a minimum, hardship withdrawal paperwork needs to be updated and many Plan recordkeepers will need to change their online request process. Given the significant number of provisions in SECURE 2.0 and the many competing timelines, recordkeepers have had to prioritize the implementation of the many SECURE 2.0 provisions so self-certification isn’t yet available across the board. For example, this is how the status of self-certification varies among some of our recordkeeping partners:
- American Funds – working on its approach.
- Ascensus (including the Vanguard/Ascensus and Merrill/Ascensus recordkeeping alternatives) – Plans have been defaulted to allow all vested money types to be included, paper forms have been changed, and the online process soon will go-live to default to self-certification.
- Empower and John Hancock – changes are in process for roll-out later this year.
- VOYA and Principal – self-certification is available but must be set up by the employer and TPA.
ACSI will continue to monitor the implementation of self-certification for all of our recordkeeping partners. For our clients’ Plans that permit hardship withdrawals, we will transition the Plan to self-certification as it becomes available and as we are able to do so. If recordkeeper changes require any Plan Amendments, ACSI will reach out to individual clients to discuss.
If you want to discuss self-certification or other SECURE 2.0 changes, please reach out to your contacts at ACSI.
