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Final Rules for 401(k) Hardship Withdrawals and ESPP Contributions

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October 29, 2019 | Barbara Baksa

Final Rules for 401(k) Hardship Withdrawals and ESPP Contributions

The IRS has issued final rules implementing the changes the Bipartisan Budget Act of 2018 made to requirements for hardship withdrawals from 401(k) plans. This change has implications for employee stock purchase plans.

A Refresher

As explained late last year in a guest blog entry by Emily Cervino of Fidelity Stock Plan Services, the Bipartisan Budget Act of 2018 imposed a number of changes to the hardship withdrawal rules for 401(k) plans, including eliminating the requirement that elective contributions to ESPPs and other employer-sponsored plans be suspended for six months following a hardship withdrawal.

Final Rules

At the end of September, the IRS issued the final rules implementing these changes. As noted in a blog by Amy Ciepluch of Foley & Lardner, the final rules make only a few changes to the rules originally proposed by the IRS. Thus, when employees take hardship withdrawals from the 401(k), it is no longer necessary to suspend the employees’ contributions to the ESPP.  

The Transition Is Ending

2019 has been a year of transition—companies were permitted to voluntarily adopt the proposed rules but were not required to do so. Now that the final rules have been issued, companies are required to adopt them effective as of January 1, 2020.

If you have already amended your 401(k) plan and ESPP to address the new rules, no further changes may be necessary. If you haven’t done anything on this yet, your 401(k) plan will most certainly need to be amended. To the extent that your ESPP includes language prohibiting contributions after a hardship withdrawal from the 401(k) plan, it may be necessary to remove this language from the ESPP.

- Barbara

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