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More About The SECURE 2.0 Retirement Plan Law Changes

By January 19, 2023No Comments

You may have recently read one or more articles about the increase in the number of hardship withdrawals from 401k Plans in 2022.  Although the overall percentage of participants who take such a withdrawal continues to be very low, the authors note that inflation likely is driving this trend.

Including a hardship withdrawal feature in a 401k Plan seems counterproductive – the savings in the Plan are intended to be for retirement, not for expenses while working.  However, statistics indicate that the feature frequently is available in a 401k Plan.  For example, in a recent Plan Sponsor Council of America study, it was reported that 82% of 401k Plans allow such withdrawals . . . but only 1.5% of Plan participants take them.

SECURE 2.0 – the significant retirement plan law change passed in late December as part of the legislation to fund the Federal government through September 2023 – permits an employer to change the hardship withdrawal approval process.

The Tax Code and IRS regulations have long required two conditions to be satisfied for a hardship withdrawal:

  1. An immediate and heavy financial need – sometimes referred to as the reason being one that the IRS permits; and
  2. The amount requested is necessary to satisfy the immediate and heavy financial need – sometimes referred to as the amount being consistent with the need.

Under the new law, if an employer (i.e., the plan administrator) wants to change the hardship withdrawal approval process, it no longer is necessary for the employer to get proof of either “1” or “2”.  The law change provides:

“[T]he administrator of the plan may rely on a written certification by the employee that the distribution is —

(i) on account of a financial need of a type which is deemed in regulations prescribed by the [IRS] to be an immediate and heavy financial need, 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 such financial need.

The [IRS] may provide by regulations for exceptions to the rule of the preceding sentence in cases where the plan administrator has actual knowledge to the contrary of the employee’s certification”.

Under ACSI’s IRS-approved 401k Plan Documentation, no Plan Amendment is necessary for an employer to implement this change.  The change can be done in operation, by an employer changing its policy and practices.

We believe the change is both good and bad.  The burden on the employer of evaluating (with our assistance) the employee’s proof of need and necessity is eliminated; but the likelihood that the employee may be “pushing the envelope” when self-certifying certainly exists.

The new approval process is allowed to be implemented immediately, if the employer chooses to make the change to the process.  However, for Plans using an institutional recordkeeper to hold and manage employee 401k accounts, we believe clients need to wait for the recordkeeper to provide new withdrawal forms or to update the online request process, to add an employee “written” certification option.

For Plans that use individual brokerage accounts or a pooled account, rather than an institutional recordkeeper, we are working on language that we believe appropriately protects the employer.  This language will be added to hardship withdrawal forms for those clients who request an employee “written” certification option.

ACSI is available to help our clients learn more about this, and other aspects of, the SECURE 2.0 changes impacting Retirement Plans.

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