The information in this document does not constitute legal advice. For assistance with legal questions specific to your situation, please consult an attorney.

How did the law change?

• Before 2007, most plans that permit hardship withdrawals (plans are not required to do so) only allowed a participant to withdraw amounts necessary to help with financial hardships incurred by the participant or the participant's spouse or dependents.
• The Pension Protection Act of 2006 provides that a plan may also permit a participant to withdraw amounts necessary to help with financial hardships incurred by a nonspouse, nondependent person if the person is designated as the participant's beneficiary under the plan in the event of death.

To which retirement plans does the new law apply?

• The new law applies to most retirement plans, including 401(k) plans, 403(b) plans, 457(b) plans, employee stock ownership plans (ESOPs), profit-sharing plans, and nonqualified deferred compensation plans.
• The new law does not, however, apply to defined benefit plans (pensions) and money purchase plans.

Why is an expanded hardship provision valued by plan participants and beneficiaries?

• It provides participants with an important financial resource in the event their beneficiary has a financial hardship. For example, it may allow a participant to pay for funeral expenses for a domestic partner who is recently deceased or it may allow a participant to pay for unreimbursed medical expenses incurred by an aging parent.
• It may also encourage participants to increase voluntary contributions to their retirement plan because they know they can access their savings in times of financial need.

Is there any reason for an employer not to offer expanded hardship withdrawals?

• The expanded hardship rules are very easy to administer for an employer that currently permits hardship withdrawals. The participant's beneficiary is treated just like a dependent or spouse under the employer's existing hardship provisions.
• Some employers, however, do not permit hardship withdrawals for any reason. If an employer does not currently permit hardship withdrawals for any reason, now may be a good time to reconsider that decision more generally.

What does an employer have to do to implement the expanded hardship option?

• The employer needs to decide to offer the expanded hardship provision and notify participants of that decision.
• Employers typically need to update their hardship withdrawal forms. Many plan recordkeepers offer standardized hardship forms, including forms that have been updated for the expanded hardship option, so that the employer can simply request an updated form.

Are the rules the same for state and local government 457(b) plans and nonqualified deferred compensation plans?

• Unlike other plans, state and local government 457(b) plans and nonqualified deferred compensation plans may permit hardship withdrawals only to pay for expenses associated with an unforeseeable emergency.
• The new law provides that qualifying unforeseeable emergencies may include ones that affect the person designated as the participant's beneficiary under the plan.

Does the new law apply to all types of hardship withdrawal provisions?

• There are two types of hardship withdrawal provisions found in retirement plans. One lists the circumstances that the plan considers hardships. The other provides that whether a person has a hardship depends on all the facts and circumstances.
• Plans with either approach to defining a hardship may permit a participant to receive a withdrawal on account of a hardship incurred by the participant's beneficiary.
• Plans that use a list of circumstances that qualify as hardships typically use a list that has been published by the IRS. For this kind of a plan, a withdrawal related to a participant's beneficiary would only be permitted to pay unreimbursed medical expenses, tuition expenses, and funeral expenses of the beneficiary.

Is a plan amendment required?

• For a plan that lists the events that are permitted hardships, an amendment to the retirement plan document likely will be required at some point. However, the Pension Protection Act of 2006 provides that plan amendments need only be adopted before the end of 2009 (for calendar year plans).
• For a plan that permits hardship withdrawals based on the facts and circumstances, an amendment is not necessary.
• If the plan has never permitted hardship withdrawals of any sort, an amendment will be needed by the end of the plan year in which hardship withdrawals are first offered.

What if an employer wants to amend their plan now?

• Some employers may choose to pursue a formal plan amendment to memorialize adoption of the expanded hardship withdrawal option, even though this is not legally required until a later date. The following are examples of such an amendment for plans that list the events that are considered hardships:

  401(k) Plans and 403(b) Plans." Effective for distributions after [insert date], the Plan permits distributions for expenses described in § 1.401(k)-1(d)(3)(iii)(B)(1), (3), or (5) (relating to medical, tuition, and funeral expenses, respectively) for a primary beneficiary under the Plan. For this purpose, a "primary beneficiary under the Plan" is an individual who is named as a beneficiary under the plan and has an unconditional right to all or a portion of the participant's account balance under the Plan upon the death of the participant.

  457(b) and NQDC Plans." Effective for distributions after [insert date], the Plan shall treat a participant's primary beneficiary under the Plan the same as the participant's spouse or dependent in determining whether the participant has incurred an unforeseeable financial emergency. For this purpose, a "primary beneficiary under the Plan" is an individual who is named as a beneficiary under the plan and has an unconditional right to all or a portion of the participant's benefit under the Plan upon the death of the participant."

Recommended Implementation Steps for Employers:

1. Notify Plan Recordkeeper. Notify your retirement plan recordkeeper that you wish to adopt the Pension Protection Act's expanded hardship withdrawal rules.
2. Develop New Forms. Ask your retirement plan recordkeeper if they have an updated hardship withdrawal form that reflects the expanded hardship withdrawal rules.
3. Determine and Confirm Implementation Date. Determine by what date you and the plan's recordkeeper can implement the option and confirm that this takes place.
4. Notify Employees. Notify the participants in the plan of this new withdrawal right. Employers will likely want to make a special effort to notify employees currently enrolled in domestic partner benefit plans as well as do targeted outreach to any employee resource group for gay, lesbian, bisexual, transgender and queer employees.
5. Follow Implementation with Later Plan Amendment. If needed, ensure that a formal plan amendment is adopted consistent with the Pension Protection Act's requirements (no later than the end of 2009 for calendar year plans).