By Sheila Ninneman, JD.
A change to Internal Revenue Code (Code) Section 165 makes a small, but significant, change to one of the safe harbor hardship distribution categories found in many 401(k) and 403(b) retirement plans. Buried deep in the Tax Cuts and Jobs Act is a temporary change to Code Section 165 which addresses casualty losses that qualify for deductions. For tax years from 2018 through 2025, a taxpayer may only claim a deduction for a personal casualty loss if the loss is attributable to a federally declared disaster. This change means that for retirement plans that provide for hardship withdrawals and that adopt the safe harbor definitions, hardship withdrawals for casualty losses just became few and far between.
In general, a safe harbor hardship withdrawal request must be made on account of an immediate and heavy financial need for which the participant has no other distribution resource, such as a plan loan. The safe harbor category regarding expenses to repair damage to a participant’s principal residence further requires that the expenses would qualify for a casualty loss deduction under Code Section 165, determined without regard to whether the loss exceeds 10% of adjusted gross income. Under the old rule, the expenses could be used to repair damage that arises from fire, flood, storm or other casualty. Under the new rule, the damage must still arise from fire, flood, storm or other casualty, but now the casualty loss must also be attributable to a federally declared disaster.
Plan sponsors should review their administrative procedures as to hardship withdrawals, and make sure the folks in the administrative trenches are aware of the change.Retirement Plans, Findley Post