Compliance July 11, 2018

Student Debt Doesn’t Make Hardship, But Tuition Might

Two experienced ERISA attorneys at Drinker, Biddle and Reath warn against the idea of participants seeking a hardship withdrawal for the purpose of paying down student loan debt; requesting a hardship withdrawal for upcoming tuition expenses is another matter entirely.  

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A timely new Insights publication from the law firm of Drinker, Biddle and Reath looks back at an Internal Revenue Service (IRS) letter sent earlier this year to Representative Scott Perry, R-Pennsylvania, in response to his inquiry about whether individual taxpayers can use a qualified 401(k) plan hardship withdrawal for the purpose of paying down student loan debt.

Reviewing the IRS response—formally published as Information Letter 2018-1—Karen Gelula, counsel, and Betsy Olson, associate, point out how the IRS emphasized that a hardship distribution must, among other things, be necessary to satisfy “an immediate and heavy financial need.”

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As Gelula and Olson note, the letter does not directly address the plan provisions applicable to the specific constituent about whom Perry pinged the IRS, but instead notes that under the safe harbor standards for hardship distributions in the Internal Revenue Code Section 401(k) regulations, “education expenses” can in some cases be deemed a sufficiently immediate and heavy financial need, but only if they are for the “payment of tuition, related educational fees, and room and board expenses, for up to the next 12 months of post-secondary education.”

“The IRS confirmed in the letter that because a safe harbor hardship distribution may be made only for the prospective payment of education expenses, it cannot be made for the repayment of student loans,” Gelula and Olson write. “The IRS suggested that as an alternative to taking a hardship distribution, the participant may be able to get a loan from the plan.”

The attorneys further observe that 401(k) plans which permit non-safe harbor hardship distributions as described in the Internal Revenue Code Section 401(k) regulations could theoretically approve a participant’s hardship distribution request for the repayment of student loans, “provided that the loan repayment constitutes an immediate and heavy financial need based on all the relevant facts and circumstances.”

“Among other things, this includes the participant’s representation that the need cannot be relieved from other reasonably available resources such as insurance reimbursement, liquidation of the participant’s assets, cessation of plan contributions, other currently available distributions such as employee stock ownership plan dividends and non-taxable (at the time of the loan) plan loans, or borrowing from commercial sources,” the attorneys explain.

They also remind plan fiduciaries that the hardship distribution provisions will be changing in 2019, including the removal of the requirement in the safe harbor hardship distribution standards that a participant “take all available plan loans to demonstrate financial necessity.”

“In addition, the Treasury Secretary has been directed to remove from the safe harbor hardship distribution standards the requirement that the participant’s deferral contributions to all plans maintained by the employer must be suspended for six months following the withdrawal,” the attorneys point out.

The full IRS Information Letter 2018-01 is available here.

Compliance July 11, 2018

Retirement Savings Lost and Found Act Reintroduced in Congress

The bill would create an online database for participants to find "lost" retirement accounts and would change rules for automatic cashouts and rollovers.

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Previously introduced in 2016, U.S. Senators Elizabeth Warren, D-Massachusetts, and Steve Daines, R-Montana, have reintroduced legislation aimed at addressing the retirement plan missing participant problem.

The Retirement Savings Lost and Found Act of 2018 would set up a Lost and Found online database that uses the data employers are already required to report, so that any worker can locate all of his or her former employer-sponsored retirement accounts. According to the bill text, the Retirement Savings Lost and Found Act will provide individuals only with the ability to view contact information for the plan administrator of any plan with respect to which the individual is a participant or beneficiary, sufficient to allow the individual to locate the individual’s plan.

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Under the bill, a plan that failed to find a missing participant wouldn’t be treated as violating the required minimum distribution (RMD) rules and the Employee Retirement Income Security Act’s (ERISA) fiduciary rules if it has fulfilled certain requirements. These include making at least one (unsuccessful) attempt to contact the individual at the most recent address maintained for the individual in the records of the plan, by certified mail or other similar delivery service if the most recent address is a physical address, and by electronic mail or other electronic communication if the only address on record is an electronic address, and taking at least one (two, in the case of an individual for whom the plan records contain only an electronic address) additional measure.

The additional measures are:

  • Checked with the administrator of a related plan or checked the plan sponsor’s records for an updated address.
  • Made at least one unsuccessful attempt to contact the individual’s designated plan beneficiary.
  • Performed at least one search using free electronic search tools.
  • Attempted to locate the participant using a commercial locator service.

The bill increases the automatic rollover amount from $5,000 to $6,000 and expands investment options for these rollovers to include a target-date or lifecycle fund, an investment product designed to preserve principal and provide a reasonable rate of return, and another option as the Secretary of Treasury may provide.

For plan balances of $1,000 or less, if within six months of notification, the plan participant has not made an election to receive a distribution of the benefit directly or has not accepted any direct payment, the plan administrator can transfer the amount of such benefit to the Director of the Retirement Savings Lost and Found or to an individual retirement account established by the Secretary of Treasury on behalf of the individual.

The ERISA Industry Committee and the American Benefits Council have expressed support of the bill.

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