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Don’t Miss this Important New Requirement for your ESPP!

December 14, 2018

By Emily Cervino, CEP, Fidelity Stock Plan Services​

It’s no surprise to equity compensation professionals that year-end brings a host of activities for your stock plans. This year, don’t be caught off guard by a new requirement, courtesy of the Bipartisan Budget Act of 2018 ("Budget Act") which impacts certain elements of 401(k) plans, and, by extension, may also impact your ESPP.

Rewind. What’s this all about?

Surprising to some, but there has long been a relationship between 401(k) hardship withdrawals and ESPPs.  Per §1.401(k)-1(d)(3)(iv)(E)(2)), employees who take a hardship withdrawal from their 401(k) are also prohibited from making elective contributions to other employer-sponsored plans for at least six months after receipt of the hardship distribution.  An ESPP is a type of an employer-sponsored plan with elective contributions.

Not all stock plan professionals are well-versed in this requirements, since it is part of §401(k), not part of §423.  These ESPP suspensions may have been managed by your provider (if you have the same provider managing both 401(k) and ESPP), or, via your 401(k) and payroll teams.

What is changing?

The Budget Act made several changes to the hardship withdrawal rules that will become available on the first day of the 401(k) plan year that begins in 2019. For stock plan professionals, the primary point of interest is the update to remove the required six-month suspension of deferrals and employee contributions after receipt of a hardship withdrawal.

What this means for your ESPP is that your employees who are enrolled in the ESPP and take a hardship withdrawal from their 401(k) will no longer be required to have their ESPP contributions suspended.  And, employees who are currently on an ESPP suspension as a result of a hardship withdrawal in the last six months will be able to get back in the ESPP sooner.

When is this effective?

These rules will become available on the first day of the 401(k) plan year that begins in 2019, but they will become mandatory on the first day of the 401(k) plan year that begins in 2020.  If you don’t know what the first day of your 401(k) plan year is, now is a good time to check in with your colleagues in 401(k).

So, 2019 is a transitional year. However, many plan sponsors are eager to adopt this early to alleviate the punitive nature of the suspension requirement, which may help keep employees saving and on track for retirement and – no small consideration – may help reduce administrative burden for employers. 

What’s next?

In order to comply with this new requirement, consider these next steps:

  • Coordinate with your colleagues responsible for the 401(k) to understand current process and how your 401(k) provider is rolling out these changes.  If your stock plan service provider also manages your 401(k), your service teams may already be coordinating on this change.
  • Review your current ESPP plan document for any embedded language that may have been associated with the 401(k) requirements. If this language is included in your plan, the plan will likely need to be amended to remove it. I expect that in most cases, the amendment will be subject only to board approval (not shareholder approval), but this depends on the specific language in your plan. As with all plan amendments, you should consult your legal advisors.
  • Identify employees who are currently suspended from your ESPP as a result of a recent hardship withdrawal and identify a process for enabling their ESPP participation at the time that you transition to the new rules.
  • Update participant hardship withdrawal materials (e.g., hardship withdrawal form, employee communication material, internal documentation, etc.) to reflect the changes.
  • Update internal processes to reflect the changes.

I suspect most plan sponsors, both equity and 401(k), will appreciate the new, relaxed hardship requirements, but no one wants to be caught off guard during this time of transition.  For more information, check out this handy guide.

Emily Cervino is a Vice President at Fidelity Stock Plan Services. She has been an active participant in the equity compensation industry since 1998, and now focuses on strategic marketing initiatives, thought leadership, and building Fidelity’s strong industry presence.

Emily is a frequent speaker at equity compensation events, past president of the Silicon Valley Chapter of the NASPP, a member of NASPP, GEO, and NCEO, and a 2015 recipient of the NASPP's Individual Achievement Award. Emily is a Certified Equity Professional (CEP) and she holds Series 7 and 63 securities registrations.


Views expressed are as of the date indicated and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the author, and not necessarily those of Fidelity Investments. Links to third-party websites may be shared on this page. Those sites are unaffiliated with Fidelity. Fidelity has not been involved in the preparation of the content supplied at the unaffiliated site and does not guarantee or assume any responsibility for its content. Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917. 870165.1.0

  • By Emily Cervino

    Head of Industry Relationships and Thought Leadership

    Fidelity Stock Plan Services