[Federal Register Volume 84, Number 184 (Monday, September 23, 2019)]
[Rules and Regulations]
[Pages 49651-49659]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20511]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9875]
RIN-1545-BO82


Hardship Distributions of Elective Contributions, Qualified 
Matching Contributions, Qualified Nonelective Contributions, and 
Earnings

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that amend the rules 
relating to hardship distributions from section 401(k) plans. The final 
regulations reflect statutory changes affecting section 401(k) plans, 
including changes made by the Bipartisan Budget Act of 2018. The 
regulations affect participants in, beneficiaries of, employers 
maintaining, and administrators of plans that include cash or deferred 
arrangements or provide for employee or matching contributions.

DATES: 
    Effective Date: These regulations are effective September 23, 2019.
    Applicability Date: For dates of applicability, see Sec.  1.401(k)-
1(d)(3)(v).

FOR FURTHER INFORMATION CONTACT: Roger Kuehnle at (202) 317-4148 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-1669. The collection of information 
in these final regulations is in Sec.  1.401(k)-1(d)(3)(iii)(B). The 
collection of information relates to the certification by participants 
in section 401(k) plans that they have insufficient cash or other 
liquid assets reasonably available to cover expenses resulting from a 
hardship and, thus, will need a distribution from the plan to meet the 
expenses. The collection of information is required to obtain a 
benefit.
    The likely recordkeepers are individuals.
    Estimated total annual reporting burden: 101,250 hours.
    Estimated average annual burden per respondent: 45 minutes.
    Estimated number of respondents: 135,000.
    Estimated frequency of responses: On occasion.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.

Background

Section 401(k)

    Section 401(k)(1) of the Internal Revenue Code (Code) provides that 
a profit-sharing, stock bonus, pre-ERISA money purchase, or rural 
cooperative plan will not fail to qualify under section 401(a) merely 
because it includes a cash or deferred arrangement (CODA) that is a 
qualified CODA. Under section 401(k)(2), a CODA (generally, an 
arrangement providing for an election by an employee between 
contributions to a plan or payments directly in cash) is a qualified 
CODA only if it satisfies certain requirements. Section 401(k)(2)(B) 
provides that contributions made pursuant to a qualified CODA (referred 
to as ``elective contributions'') may be distributed only on or after 
the occurrence of certain events, including death, disability, 
severance from employment, termination of the plan, attainment of age 
59\1/2\, hardship, or, in the case of a qualified reservist 
distribution, the date a reservist is called to active duty. Section 
401(k)(2)(C) requires that elective contributions be nonforfeitable at 
all times.
    Section 401(k)(3)(A)(ii) requires that elective contributions 
satisfy the actual deferral percentage (ADP) test set forth in section 
401(k)(3). Sections 401(k)(11), 401(k)(12), and 401(k)(13) each provide 
an alternative method of meeting the ADP test. Under section 
401(k)(3)(D), qualified nonelective contributions (QNECs) and qualified 
matching contributions (QMACs), as described in sections 401(m)(4)(C) 
and 401(k)(3)(D)(ii)(I), respectively, are permitted to be taken into 
account under the ADP test. Among other requirements, QNECs and QMACs 
must satisfy the distribution limitations of section 401(k)(2)(B) and 
the nonforfeitability requirements of section 401(k)(2)(C). Similarly, 
employer contributions that are made pursuant to the safe harbor plan 
designs of section 401(k)(12) or (13) must meet the distribution 
limitations of section 401(k)(2)(B).
    Section 401(m)(2)(A) requires that matching contributions and 
employee contributions satisfy the actual contribution percentage (ACP) 
test set forth in section 401(m)(2). Sections 401(m)(10), 401(m)(11), 
and 401(m)(12) each provide an alternative method of meeting the ACP 
test with respect to matching contributions. As with contributions made 
to section 401(k) plans pursuant to safe harbor plan designs, employer 
contributions made pursuant to the safe harbor plan designs of section 
401(m)(11) or (12) must meet the distribution limitations of section 
401(k)(2)(B).

Existing Regulations Under Section 401(k)

    The Department of the Treasury (Treasury Department) and the IRS 
issued comprehensive regulations under sections 401(k) and 401(m) on 
December 29, 2004 (TD 9169, 69 FR 78143). Since that time, the 
regulations have been updated to reflect certain subsequent changes to 
the applicable statute (see TD 9237, 71 FR 6, and TD 9324, 72 FR

[[Page 49652]]

21103, providing guidance on designated Roth contributions under 
section 402A; and TD 9447, 74 FR 8200, providing guidance on section 
401(k)(13)). Although the regulations have not been updated to reflect 
other statutory changes, they have been amended to address certain 
discrete issues unrelated to statutory changes (see TD 9319, 72 FR 
16878, relating to the definition of compensation; TD 9641, 78 FR 
68735, relating to mid-year amendments to safe harbor plan designs; and 
TD 9835, 83 FR 34469, relating to whether QNECs and QMACs must be 
nonforfeitable when contributed to the plan).
    Section 1.401(k)-1(d)(3) provides rules for determining whether a 
distribution is made on account of an employee's hardship. Under those 
rules, a distribution is made on account of hardship only if the 
distribution is made on account of an immediate and heavy financial 
need and the amount of the distribution is not in excess of the amount 
necessary to satisfy that need (plus any amounts necessary to pay any 
taxes or penalties reasonably anticipated to result from the 
distribution). These determinations must be made on the basis of all 
the relevant facts and circumstances and in accordance with 
nondiscriminatory and objective standards set forth in the plan.
    Section 1.401(k)-1(d)(3)(iv)(B) provides that a distribution is not 
treated as necessary to satisfy an immediate and heavy financial need 
of an employee to the extent the need may be relieved from other 
resources that are reasonably available to the employee (including 
assets of the employee's spouse and minor children that are reasonably 
available to the employee). Under Sec.  1.401(k)-1(d)(3)(iv)(C), in 
determining whether the need can be relieved from other resources that 
are reasonably available to an employee, the employer may rely on the 
employee's representation (unless the employer has actual knowledge to 
the contrary) that the need cannot reasonably be relieved from 
resources specified in Sec.  1.401(k)-1(d)(3)(iv)(C).
    To simplify administration, the regulations provide certain safe 
harbors that may be used to determine whether a distribution is made on 
account of an employee's hardship. Specifically, Sec.  1.401(k)-
1(d)(3)(iii)(B) provides a safe harbor under which distributions for 
six types of expenses are deemed to be made on account of an immediate 
and heavy financial need. One of the six types is ``expenses for the 
repair of damage to the employee's principal residence that would 
qualify for the casualty deduction under section 165 (determined 
without regard to whether the loss exceeds 10% of adjusted gross 
income).''
    In addition, Sec.  1.401(k)-1(d)(3)(iv)(E) provides a safe harbor 
under which a distribution is deemed necessary to satisfy an immediate 
and heavy financial need. Under that safe harbor, an employee must 
first obtain all currently available distributions (including 
distributions of employee stock ownership plan (ESOP) dividends under 
section 404(k), but not hardship distributions), and nontaxable plan 
loans from the plan and any other plan maintained by the employer. 
Under the safe harbor, an employee's ability to make elective 
contributions and employee contributions to the plan (and any other 
plan maintained by the employer) must be suspended for at least 6 
months after receipt of the hardship distribution. Pursuant to Sec.  
1.401(k)-3(c)(6)(v)(B), in the case of a safe harbor plan described in 
section 401(k)(12) or (13), the suspension period may not exceed 6 
months.
    Under Sec.  1.401(k)-1(d)(3)(ii), the maximum amount that may be 
distributed on account of hardship is the total of the employee's 
elective contributions that have not previously been distributed (plus 
earnings, QNECs, and QMACs credited before a specified grandfather date 
that generally is before 1989). Thus, the maximum amount that may be 
distributed on account of hardship does not include earnings, QNECs, or 
QMACs that are not grandfathered.

Section 403(b)

    Section 403(b)(7)(A)(ii) provides distribution limitations on 
amounts contributed to a custodial account that is treated as a section 
403(b) annuity contract. Section 403(b)(11) provides that contributions 
made pursuant to a salary reduction agreement (within the meaning of 
section 402(g)(3)(C)) (generally referred to in the regulations under 
section 403(b) as ``section 403(b) elective deferrals'') may be 
distributed only on or after the occurrence of certain events, one of 
which is the employee's hardship. Section 403(b)(11) also provides that 
no income attributable to these contributions may be distributed on 
account of hardship.
    Section 1.403(b)-6 provides rules for applying these distribution 
limitations. Section 1.403(b)-6(b) applies to distributions of amounts 
that are neither attributable to section 403(b) elective deferrals nor 
made from custodial accounts, Sec.  1.403(b)-6(c) applies to 
distributions from custodial accounts that are not attributable to 
section 403(b) elective deferrals, and Sec.  1.403(b)-6(d) applies to 
distributions of amounts attributable to section 403(b) elective 
deferrals. Section 1.403(b)-6(d)(2) provides that a hardship 
distribution of section 403(b) elective deferrals is subject to the 
rules and restrictions set forth in Sec.  1.401(k)-1(d)(3) and is 
limited to the aggregate dollar amount of a participant's section 
403(b) elective deferrals, without earnings thereon.

Statutory Changes Relating to Section 401(k)

    Section 41113 of the Bipartisan Budget Act of 2018, Public Law 115-
123 (BBA 2018), directs the Secretary of the Treasury to modify Sec.  
1.401(k)-1(d)(3)(iv)(E) to (1) delete the 6-month prohibition on 
contributions following a hardship distribution and (2) make any other 
modifications necessary to carry out the purposes of section 
401(k)(2)(B)(i)(IV). Section 41114 of BBA 2018 modified the hardship 
distribution rules under section 401(k)(2)(B) by adding section 
401(k)(14)(A) to the Code, which states that the maximum amount 
available for distribution upon hardship includes (1) contributions to 
a profit-sharing or stock bonus plan to which section 402(e)(3) 
applies, (2) QNECs, (3) QMACs, and (4) earnings on these contributions. 
Section 41114 of BBA 2018 also added section 401(k)(14)(B) to the Code, 
which provides that a distribution is not treated as failing to be made 
upon the hardship of an employee solely because the employee does not 
take any available loan under the plan.
    Section 11044 of the Tax Cuts and Jobs Act, Public Law 115-97 
(TCJA), added section 165(h)(5) to the Code. Section 165(h)(5) provides 
that, for taxable years 2018 through 2025, the deduction for a personal 
casualty loss generally is available only to the extent the loss is 
attributable to a federally declared disaster (as defined in section 
165(i)(5)).
    Section 826 of the Pension Protection Act of 2006, Public Law 109-
280 (PPA '06), directs the Secretary of the Treasury to modify the 
rules relating to hardship distributions to permit a section 401(k) 
plan to treat a participant's beneficiary under the plan the same as 
the participant's spouse or dependent in determining whether the 
participant has incurred a hardship. Notice 2007-7, 2007-5 I.R.B. 395, 
provides guidance for applying this provision.
    Section 827(a) of PPA '06 added to the Code section 72(t)(2)(G), 
which exempts certain distributions from the application of the section 
72(t) additional income tax on early distributions. These 
distributions, made

[[Page 49653]]

during the period that a reservist has been called to active duty, are 
referred to as ``qualified reservist distributions,'' and could include 
distributions attributable to elective contributions. Section 827(b)(1) 
of PPA '06 added section 401(k)(2)(B)(i)(V) to the Code, which permits 
qualified reservist distributions to be made from a section 401(k) 
plan.\1\
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    \1\ While section 827(b)(2) and (3) of PPA '06 amended section 
403(b)(7)(A)(ii) and (b)(11) to permit qualified reservist 
distributions to be made from a section 403(b) plan, the regulations 
under section 403(b) have not yet been updated to reflect these 
statutory amendments.
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    Section 105(b)(1)(A) of the Heroes Earnings Assistance and Relief 
Tax Act of 2008, Public Law 110-245 (HEART Act), added section 
414(u)(12) to the Code. Section 414(u)(12)(B)(ii) provides for a 6-
month suspension of elective contributions and employee contributions 
after certain distributions to individuals performing service in the 
uniformed services.
    On November 14, 2018, the Treasury Department and the IRS published 
proposed regulations (REG-107813-18) under section 401(k) and (m) in 
the Federal Register (83 FR 56763). No public hearing was requested or 
held. Seven comments on the proposed regulations were received during 
the comment period. After consideration of the comments, the proposed 
regulations are adopted as revised by this Treasury decision.

Summary of Comments and Explanation of Provisions

Overview

    The final regulations update the section 401(k) and (m) regulations 
to reflect: (1) The enactment of (a) sections 41113 and 41114 of BBA 
2018, (b) sections 826 and 827 of PPA '06, and (c) section 105(b)(1)(A) 
of the HEART Act; and (2) the application of the hardship distribution 
rules in light of the modification to the casualty loss deduction rules 
made by section 11044 of the TCJA. The final regulations are 
substantially similar to the proposed regulations, and plans that 
complied with the proposed regulations will satisfy the final 
regulations.

Deemed Immediate and Heavy Financial Need

    The final regulations, like the proposed regulations, modify the 
safe harbor list of expenses in existing Sec.  1.401(k)-1(d)(3)(iii)(B) 
for which distributions are deemed to be made on account of an 
immediate and heavy financial need by: (1) Adding ``primary beneficiary 
under the plan'' as an individual for whom qualifying medical, 
educational, and funeral expenses may be incurred; (2) modifying the 
expense listed in existing Sec.  1.401(k)-1(d)(3)(iii)(B)(6) (relating 
to damage to a principal residence that would qualify for a casualty 
deduction under section 165) to provide that for this purpose the 
limitations in section 165(h)(5) (added by section 11044 of the TCJA) 
do not apply; and (3) adding a new type of expense to the list, 
relating to expenses incurred as a result of certain disasters.
    Several commenters observed that this new safe harbor expense, 
which is described in the preamble to the proposed regulations as 
similar to relief provided by the IRS after certain major federally 
declared disasters, is narrower in certain respects than this past IRS 
relief and asked for confirmation that the narrowing is intentional. 
Some commenters also raised the concern that the new safe harbor 
expense would lead the IRS to discontinue its practice of issuing 
announcements providing such relief. The effect of the new safe harbor 
expense differs from the disaster-relief announcements in three main 
respects.
    First, only disaster-related expenses and losses of an employee who 
lived or worked in the disaster area will qualify for the new safe 
harbor expense, and not, as under the disaster-relief announcements, 
expenses and losses of the employee's relatives and dependents. The 
Treasury Department and IRS have concluded that limiting distributions 
only to those employees directly affected by a disaster is consistent 
with the purposes underlying the Code's hardship distribution 
provisions and better aligns with the relief given to affected 
individuals under section 7508A for similar disasters.
    Second, unlike under the disaster-relief announcements, there is no 
specific deadline by which a request for a disaster-related hardship 
distribution must be made and no specific authority to relax certain 
procedural requirements established by the plan administrator or plan 
terms (although it is expected that plan administrators will be 
flexible in interpreting plan terms requiring documentation relating to 
the hardship when processing hardship distribution requests during the 
difficult circumstances following a disaster).
    Third, unlike under the disaster-relief announcements, there is no 
extended deadline for plan sponsors to add disaster-related 
distribution or loan provisions to the plan. In the absence of such an 
extended deadline, a plan sponsor that does not choose to add disaster-
related hardship distribution provisions as part of an amendment 
reflecting the final regulations but instead chooses to wait until a 
disaster occurs to add those provisions (or to add a loan provision) 
would need to adopt a plan amendment by the end of the plan year the 
amendment is first effective.
    Making expenses related to certain disasters a safe harbor expense 
is intended to eliminate any delay or uncertainty concerning access to 
plan funds that might otherwise occur following a major disaster. 
Accordingly, the Treasury Department and IRS expect that no more 
disaster-relief announcements will be needed. However, the Treasury 
Department and IRS are considering separate guidance to address delayed 
amendment deadlines when the new safe harbor expense or loan provisions 
are added to a plan at a later date in response to a particular 
disaster.

Distribution Necessary To Satisfy Financial Need

    Pursuant to sections 41113 and 41114 of BBA 2018, the final 
regulations, like the proposed regulations, modify the rules for 
determining whether a distribution is necessary to satisfy an immediate 
and heavy financial need by eliminating (1) any requirement that an 
employee be prohibited from making elective contributions and employee 
contributions after receipt of a hardship distribution and (2) any 
requirement to take plan loans prior to obtaining a hardship 
distribution. In particular, the final regulations, like the proposed 
regulations, eliminate the safe harbor in existing Sec.  1.401(k)-
1(d)(3)(iv)(E), under which a distribution is deemed necessary to 
satisfy the financial need only if elective contributions and employee 
contributions are suspended for at least 6 months after a hardship 
distribution is made and, if available, nontaxable plan loans are taken 
before the hardship distribution is made.
    The proposed regulations eliminate the rules in existing Sec.  
1.401(k)-1(d)(3)(iv)(B) (under which the determination of whether a 
distribution is necessary to satisfy a financial need is based on all 
the relevant facts and circumstances) and provide one general standard 
for determining whether a distribution is necessary. Under this general 
standard, a hardship distribution may not exceed the amount of an 
employee's need (including any amounts necessary to pay any federal, 
state, or local income taxes or penalties reasonably anticipated to 
result from the distribution), the employee must have obtained other 
available, non-hardship distributions under the employer's

[[Page 49654]]

plans, and the employee must provide a representation that he or she 
has insufficient cash or other liquid assets available to satisfy the 
financial need. A hardship distribution may not be made if the plan 
administrator has actual knowledge that is contrary to the 
representation. These modifications are adopted in the final 
regulations with the changes described later in this preamble relating 
to employee representations and the type of plans subject to the 
prohibition on suspensions.
    Two commenters asked that ESOP dividends under section 404(k) be 
excepted from the requirement that an employee must first obtain other 
currently available distributions under the employer's plans. 
Alternatively, they asked that plans be permitted to disregard that 
distribution requirement with respect to those dividends if the 
dividends are less than a specified dollar amount. The comments appear 
to reflect a misinterpretation of the breadth of the distribution 
requirement. Under both the existing regulations and the proposed 
regulations, the distribution requirement applies only to distributions 
that are ``currently available,'' which significantly limits the ESOP 
dividends subject to the rule. Specifically, the only ESOP dividends 
that must be distributed under this rule are those that, at the time of 
the employee's hardship withdrawal request, both (1) have been paid to 
the plan and (2) are available for the employee to elect to receive in 
cash. Thus, for example, if an ESOP requires a participant to make an 
irrevocable election whether to receive a dividend by a deadline that 
is in advance of the dividend payment date, then a participant who does 
not elect to receive the dividend by that deadline and who later 
requests a hardship distribution has no dividends currently available. 
Although in some instances these ESOP dividend amounts may be small 
and, if distributed, would have a minimal impact on alleviating a 
hardship, the Treasury Department and IRS have concluded that ESOP 
dividends should not be treated differently than any other nonhardship 
distributions that are currently available under the plan. Accordingly, 
no changes were made in response to these comments.
    One commenter was concerned that the requirement for an employee to 
make a representation regarding the unavailability of cash or other 
liquid assets to satisfy the financial need would be a problem if the 
employee has those assets but has another immediate need for them. In 
response to the comment, the final regulations provide that the 
employee representation only relates to whether the employee has cash 
or other liquid assets that are ``reasonably available'' to satisfy the 
need. Thus, an employee could make a representation that he or she has 
insufficient cash or other liquid assets reasonably available to 
satisfy a financial need even if the employee did have cash or other 
liquid assets on hand, provided those assets were earmarked for payment 
of an obligation in the near future (for example, rent).
    The proposed regulations provide that the employee representation 
may be made ``in writing, by an electronic medium, or in such other 
form as may be prescribed by the Commissioner.'' One commenter asked 
for clarification that a verbal representation via telephone could be 
used if it is recorded. The final regulations clarify that this method 
is acceptable, by referencing the definition of ``electronic medium'' 
at Sec.  1.401(a)-21(e)(3).
    Two commenters asked for clarification of the requirement that a 
plan administrator not have ``actual knowledge'' that is contrary to an 
employee's representation or, alternatively, they asked that the 
requirement be eliminated. The requirement does not impose upon plan 
administrators an obligation to inquire into the financial condition of 
employees who seek hardship distributions. Rather, the rule is limited 
to situations in which the plan administrator already possesses 
sufficiently accurate information to determine the veracity of an 
employee representation. The Treasury Department and IRS believe the 
requirement helps ensure the integrity of the procedures used to 
determine whether a distribution is necessary to satisfy an employee's 
financial need. Accordingly, the final regulations retain the actual-
knowledge requirement.
    The final regulations, like the proposed regulations, provide that 
a plan generally may provide for additional conditions, such as those 
described in 26 CFR 1.401(k)-1(d)(3)(iv)(B) and (C) (revised as of 
April 1, 2019), to demonstrate that a distribution is necessary to 
satisfy an immediate and heavy financial need of an employee. However, 
like the proposed regulations, the final regulations do not permit a 
plan to provide for a suspension of elective contributions or employee 
contributions as a condition of obtaining a hardship distribution. This 
is responsive to Congress' concern in enacting section 41113 of BBA 
2018 that a suspension impedes an employee's ability to replace 
distributed funds. See the Ways and Means Committee description of 
section 1503 of H.R. 1,\2\ which became section 41113 of BBA 2018.
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    \2\ H.R. Rep. No. 115-409, at 196 (2017).
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    One commenter asked what conditions, besides those listed in 
existing Sec.  1.401(k)-1(d)(3)(iv)(B) and (C) (other than a suspension 
of contributions), could be imposed on a hardship distribution, 
suggesting that completing a plan's application process and providing 
required documentation should be permissible conditions. The Treasury 
Department and IRS agree that these two conditions are permissible. The 
Treasury Department and IRS also note that plan sponsors have available 
a broad range of conditions that may be imposed on a hardship 
distribution; for example, a plan could provide for a 
nondiscriminatory, minimum dollar amount for a hardship distribution.
    Another commenter recommended that the prohibition on suspensions 
of elective contributions and employee contributions in the proposed 
regulations be eliminated and plan sponsors be given the flexibility to 
impose a suspension. However, in light of Congress' expressed concern 
that a suspension impedes an employee's ability to replace distributed 
funds, the final regulations retain the prohibition on suspensions.
    Another commenter requested guidance on which other plans of the 
employer, besides the plan making the hardship distribution, are 
subject to the prohibition on suspensions. Although the existing safe 
harbor in Sec.  1.401(k)-1(d)(3)(iv)(E)(2) imposes a mandatory 
suspension with respect to all qualified and nonqualified plans 
maintained by the employer, the proposed regulations do not specify the 
plans to which the prohibition on suspensions applies. The Treasury 
Department and IRS have concluded that Congress' concerns underlying 
section 41113 of BBA 2018 have little relevance to unfunded 
nonqualified plans. Accordingly, the final regulations provide that the 
prohibition on suspensions applies only to a qualified plan, a section 
403(b) plan, and an eligible deferred compensation plan described in 
section 457(b) maintained by an eligible employer described in section 
457(e)(1)(A). Thus, a plan subject to section 409A may retain its 
suspension provisions (or, to the extent consistent with section 409A 
and the regulations thereunder, the plan may be amended to remove 
them).
    Another commenter requested guidance on the continuing 
applicability of revenue rulings that require a ``substantial 
limitation'' on the right of a participant to withdraw

[[Page 49655]]

matched employee contributions, such as a suspension of contributions. 
See, for example, Rev. Rul. 74-56, 1974-1 C.B. 90. Under the final 
regulations, if, on or after January 1, 2020, matched employee 
contributions are distributed in conjunction with a hardship 
distribution of elective contributions, a suspension of employee 
contributions is not permitted.\3\
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    \3\ Issues relating to the applicability of prior revenue 
rulings to distributions of matched employee contributions not made 
in conjunction with a hardship distribution of elective 
contributions are beyond the scope of these regulations.
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Expanded Sources for Hardship Distributions

    Pursuant to section 41114 of BBA 2018, the final regulations, like 
the proposed regulations, modify existing Sec.  1.401(k)-1(d)(3) to 
permit hardship distributions from section 401(k) plans of elective 
contributions, QNECs, QMACs, and earnings on these amounts, regardless 
of when contributed or earned.
    Several commenters asked how the new distribution rules apply to 
safe harbor contributions made to a plan described in section 
401(k)(12). Because safe harbor contributions made to a plan described 
in section 401(k)(12) are either QNECs or QMACs, amounts attributable 
to these contributions may be distributed on account of hardship. As 
noted in the preamble to the proposed regulations, safe harbor 
contributions made to a plan described in section 401(k)(13) may also 
be distributed on account of an employee's hardship (because these 
contributions are subject to the same distribution limitations 
applicable to QNECs and QMACs). See Sec.  1.401(k)-3(k)(3)(i). However, 
a plan may limit the type of contributions available for hardship 
distributions and may exclude earnings on those contributions from 
hardship distribution eligibility.

Section 403(b) Plans

    Section 1.403(b)-6(d)(2) provides that a hardship distribution of 
section 403(b) elective deferrals is subject to the rules and 
restrictions set forth in Sec.  1.401(k)-1(d)(3); accordingly, the 
preamble to the proposed regulations states that the new rules relating 
to a hardship distribution of elective contributions from a section 
401(k) plan generally apply to section 403(b) plans. Two commenters 
asked whether, in light of historical concerns about employee self-
certification in section 403(b) plans, the employee-representation 
requirement applies to section 403(b) plans. Because this requirement 
is retained in the final regulations, at Sec.  1.401(k)-
1(d)(3)(iii)(B), it applies to section 403(b) plans.
    The preamble to the proposed regulations addresses other issues 
related to hardship distributions under section 403(b) plans, and 
states that because Code section 403(b)(11) was not amended by section 
41114 of BBA 2018, income attributable to section 403(b) elective 
deferrals continues to be ineligible for distribution on account of 
hardship. As also stated in that preamble, amounts attributable to 
QNECs and QMACs may be distributed from a section 403(b) plan on 
account of hardship only to the extent that, under Sec.  1.403(b)-6(b) 
and (c), hardship is a permitted distributable event for amounts that 
are not attributable to section 403(b) elective deferrals. Thus, QNECs 
and QMACs in a section 403(b) plan that are not in a custodial account 
may be distributed on account of hardship, but QNECs and QMACs in a 
section 403(b) plan that are in a custodial account continue to be 
ineligible for distribution on account of hardship.

Applicability Dates

    The changes to the hardship distribution rules made by BBA 2018 are 
effective for plan years beginning after December 31, 2018. The final 
regulations provide plan sponsors with a number of applicability-date 
options. Although presented differently in the proposed regulations, 
the options available to plan sponsors under the final regulations are 
the same as those available under the proposed regulations.
    In response to a comment on the proposed regulations requesting 
clarity regarding which rules apply during 2019, the final regulations 
provide that Sec.  1.401(k)-1(d)(3) applies to distributions made on or 
after January 1, 2020 (rather than, as in the proposed regulations, to 
distributions made in plan years beginning after December 31, 2018). 
However, Sec.  1.401(k)-1(d)(3) may be applied to distributions made in 
plan years beginning after December 31, 2018, and the prohibition on 
suspending an employee's elective contributions and employee 
contributions as a condition of obtaining a hardship distribution may 
be applied as of the first day of the first plan year beginning after 
December 31, 2018, even if the distribution was made in the prior plan 
year. Thus, for example, a calendar-year plan that provides for 
hardship distributions under the pre-2019 safe harbor standards may be 
amended to provide that an employee who receives a hardship 
distribution in the second half of the 2018 plan year will be 
prohibited from making contributions only until January 1, 2019 (or may 
continue to provide that contributions will be suspended for the 
originally scheduled 6 months).
    If the choice is made to apply Sec.  1.401(k)-1(d)(3) to 
distributions made before January 1, 2020, the new rules requiring an 
employee representation and prohibiting a suspension of contributions 
may be disregarded with respect to those distributions. To the extent 
early application of Sec.  1.401(k)-1(d)(3) is not chosen, the rules in 
Sec.  1.401(k)-1(d)(3), prior to amendment by this Treasury decision, 
apply to distributions made before January 1, 2020, taking into account 
statutory changes effective before 2020 that are not reflected in that 
regulation.
    In addition, the revised list of safe harbor expenses may be 
applied to distributions made on or after a date that is as early as 
January 1, 2018. Thus, for example, a plan that made hardship 
distributions relating to casualty losses deductible under section 165 
without regard to the changes made to section 165 by the TCJA (which, 
effective in 2018, require that, to be deductible, losses must result 
from a federally declared disaster) may be amended to apply the revised 
safe harbor expense relating to casualty losses to distributions made 
in 2018, so that plan provisions will conform to the plan's operation. 
Similarly, a plan may be amended to apply the revised safe harbor 
expense relating to losses (including loss of income) incurred by an 
employee on account of a disaster that occurred in 2018, provided that 
the employee's principal residence or principal place of employment at 
the time of the disaster was located in an area designated by the 
Federal Emergency Management Agency for individual assistance with 
respect to the disaster.

Plan Amendments

    The Treasury Department and IRS expect that plan sponsors will need 
to amend their plans' hardship distribution provisions to reflect the 
final regulations, and any such amendment must be effective for 
distributions beginning no later than January 1, 2020. The deadline for 
amending a disqualifying provision is set forth in Rev. Proc. 2016-37, 
2016-29 I.R.B. 136. For example, with respect to an individually 
designed plan that is not a governmental plan, the deadline for 
amending the plan to reflect a change in qualification requirements is 
the end of the second calendar year that begins after the issuance of 
the Required Amendments List (RAL) described in

[[Page 49656]]

section 9 of Rev. Proc. 2016-37 that includes the change; if the final 
regulations are included in the 2019 RAL, the deadline will be December 
31, 2021.
    A plan provision that does not result in the failure of the plan to 
satisfy the qualification requirements, but is integrally related to a 
qualification requirement that has been changed in a manner that 
requires the plan to be amended, may be amended by the same deadline 
that applies to the required amendment. The Treasury Department and IRS 
have determined that a plan amendment modifying a plan's hardship 
distribution provisions that is effective no later than the required 
amendment, including a plan amendment reflecting one or more of the 
following, will be treated as amending a provision that is integrally 
related to a qualification requirement that has been changed: (1) The 
change to section 165 (relating to casualty losses); (2) the addition 
of the new safe harbor expense (relating to expenses incurred as a 
result of certain federally declared disasters); and (3) the extension 
of the relief under Announcement 2017-15, 2017-47 I.R.B. 534, to 
victims of Hurricanes Florence and Michael that was provided in the 
preamble to the proposed regulations. Thus, in the case of an 
individually designed plan, the deadline for such an integrally related 
amendment will be the same as the deadline for the required amendment 
(described in the preceding paragraph), even if some of the amendment 
provisions have an earlier effective date.
    Several commenters requested guidance on amendment deadlines for 
pre-approved plans. The deadline for adopting a required amendment (as 
well as any integrally related amendment) to a pre-approved plan is set 
forth in section 15 of Rev. Proc. 2016-37, and varies depending on 
several factors, including the type of entity sponsoring the plan and 
the period used for the plan year. For example, under Rev. Proc. 2016-
37, in the case of an employer with a calendar-year tax year that 
maintains a pre-approved plan with a calendar-year plan year and that 
chose to apply the new safe harbor expense for certain disasters in 
2018, the deadline to adopt such an interim amendment for the new 
expense would be the tax-filing deadline (plus extensions) for 2018. 
The Treasury Department and IRS recognize that, for an employer using a 
pre-approved plan, the interim amendment deadline under Rev. Proc. 
2016-37 that applies for an amendment to a plan provision that is 
integral to the qualification requirement that has been changed may be 
earlier than the interim amendment deadline for the required amendment. 
Accordingly, the Treasury Department and IRS are extending the deadline 
for an interim amendment related to the hardship distribution 
provisions. Under this extension, for an employer using a pre-approved 
plan, the interim amendment deadline for the required amendment to the 
hardship distribution provisions of the plan will also be the deadline 
for all amendments integrally related to the hardship distribution 
provisions (rather than the earlier deadline that might otherwise apply 
under Rev. Proc. 2016-37 to those integrally related amendments). Thus, 
if the employer in the example in this paragraph were to implement the 
prohibition on suspensions effective for distributions made on or after 
January 1, 2020, the interim amendment deadline to add the new safe 
harbor expense would be the same as the deadline for the required 
amendment (that is, the tax-filing deadline (plus extensions) for 
2020), even if the new safe harbor expense is effective in an earlier 
year.
    Several commenters also requested guidance on the amendment 
deadlines for pre-approved and individually designed section 403(b) 
plans. Under Rev. Proc. 2017-18, 2017-5 I.R.B. 743, the remedial 
amendment deadline for a section 403(b) plan is March 31, 2020. The 
Treasury Department and IRS are considering providing for a later 
amendment deadline for the amendments relating to the final regulations 
in separate guidance.

Other Issues

    Several commenters requested that the Internal Revenue Manual (IRM) 
be updated to reflect the new hardship distribution rules. The IRS 
intends to update the IRM to reflect the new rules in the final 
regulations after publication of the final regulations.
    Two commenters asked whether a plan must include every one of the 
seven expenses in the Sec.  1.401(k)-1(d)(3)(ii)(B) list of deemed 
immediate and heavy financial needs and cover every individual 
described in the list (for example, a primary beneficiary under the 
plan, in the case of certain expenses) in order to be considered as 
using the safe harbor standards for hardship distributions. Under the 
IRS's pre-approved plan program for qualified plans, certain section 
401(k) plans that provide for hardship distributions will not be 
approved unless the distributions are made under circumstances 
described in the safe harbor standards in the regulations under section 
401(k). For this purpose, a plan making hardship distributions for some 
but not all the safe harbor expenses, or for expenses of some but not 
all the categories of individuals described in Sec.  1.401(k)-
1(d)(3)(ii)(B), is considered to be using the safe harbor standards for 
hardship distributions.
    One commenter asked whether the proposed regulations' prohibition 
on suspensions of elective contributions and employee contributions 
applies to pre-approved section 403(b) plans in light of the fact that 
the IRS's rules for pre-approved section 403(b) plans require that a 
participant's elective deferrals be suspended for 6 months following a 
hardship distribution. The prohibition on suspensions is retained in 
the final regulations, and the rule applies to section 403(b) plans, 
including pre-approved section 403(b) plans.
    Also, one commenter asked for relief relating to the notice 
requirements for safe harbor plans described in sections 401(k)(12) and 
401(k)(13). Because a description of withdrawal provisions is required 
to be included in the notice provided to eligible employees (see Sec.  
1.401(k)-3(d)(2)(ii)(G)), if a description of the new hardship 
withdrawal provisions was not already included in a notice, employees 
must be provided an updated notice reflecting the new hardship 
withdrawal provisions and must be given a reasonable opportunity to 
change their cash or deferred election. See section III.C of Notice 
2016-16, 2016-7 I.R.B. 318, for the notice-timing and election-
opportunity requirements with respect to mid-year amendments to safe 
harbor plans.

Special Analyses

    These regulations are not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Treasury Department and the Office of Management 
and Budget regarding review of tax regulations.
    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that the collection of information in these 
regulations will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that employers with section 401(k) plans that permit hardship 
withdrawals must already maintain records relating to an employee's 
application for a hardship withdrawal, and the incremental cost due to 
the new certification requirement in final regulations Sec.  1.401(k)-
1(d)(3)(iii)(B)(2) will be minimal. In addition, some employers, 
including some small entities, use a hardship withdrawal procedure 
available under the existing

[[Page 49657]]

regulations that requires an employee certification almost identical to 
that in the final regulations. Therefore, a regulatory flexibility 
analysis under the Regulatory Flexibility Act is not required. Pursuant 
to section 7805(f) of the Code, the notice of proposed rulemaking 
preceding these regulations was submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small businesses, and no comment was received.

Drafting Information

    The principal author of these regulations is Roger Kuehnle of the 
Office of Associate Chief Counsel (Employee Benefits, Exempt 
Organizations, and Employment Taxes). However, other personnel from the 
IRS and Treasury Department participated in their development.

Statement of Availability of IRS Documents

    The IRS notices, revenue procedures and other guidance cited in 
this preamble are published in the Internal Revenue Bulletin (or 
Cumulative Bulletin) and are available from the Superintendent of 
Documents, U.S. Government Publishing Office, Washington, DC 20402, or 
by visiting the IRS website at http://www.irs.gov.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 401(m)(9) and 26 U.S.C. 7805.
* * * * *

0
Par. 2. Section 1.401(k)-0 is amended under the heading Sec.  1.401(k)-
1 by revising the entries for (d)(3)(ii) and (d)(3)(ii)(A) and (B), 
adding an entry for (d)(3)(ii)(C), revising the entries for (d)(3)(iii) 
and (d)(3)(iii)(A) and (B), adding an entry for (d)(3)(iii)(C), 
revising the entry for (d)(3)(iv), removing the entries for 
(d)(3)(iv)(A) through (F), revising the entry for (d)(3)(v), and adding 
the entries for (d)(3)(v)(A) through (C) to read as follows:


Sec.  1.401(k)-0  Table of contents.

* * * * *
Sec.  1.401(k)-1 Certain cash or deferred arrangements.
* * * * *
    (d) * * *
    (3) * * *
    (ii) Immediate and heavy financial need.
    (A) In general.
    (B) Deemed immediate and heavy financial need.
    (C) Primary beneficiary under the plan.
    (iii) Distribution necessary to satisfy financial need.
    (A) Distribution may not exceed amount of need.
    (B) No alternative means reasonably available.
    (C) Additional conditions.
    (iv) Commissioner may expand standards.
    (v) Applicability date.
    (A) General rule.
    (B) Options for earlier application.
    (C) Certain rules optional in 2019.
* * * * *

0
Par. 3. Section 1.401(k)-1 is amended by:
0
1. Revising paragraphs (d)(1)(ii) and (iii) and adding new paragraph 
(d)(1)(iv).
0
2. Removing paragraph (d)(3)(ii) and redesignating paragraphs 
(d)(3)(iii), (iv), and (v) as paragraphs (d)(3)(ii), (iii), and (iv).
0
3. Revising newly redesignated paragraph (d)(3)(ii)(B) and adding new 
paragraph (d)(3)(ii)(C).
0
4. Revising newly redesignated paragraphs (d)(3)(iii) and (iv) and 
adding new paragraph (d)(3)(v).
0
5. In paragraph (d)(6), removing Examples 3, 4, and 5, redesignating 
Example 6 as Example 3, and designating Examples 1 through 3 as 
paragraphs (d)(6)(i) through (iii).
0
6. In newly designated paragraph (d)(6)(ii), redesignating paragraphs 
(d)(6)(ii)(i) and (ii) as paragraphs (d)(6)(ii)(A) and (B).
    The additions and revisions read as follows:


Sec.  1.401(k)-1   Certain cash or deferred arrangements.

* * * * *
    (d) * * *
    (1) * * *
    (ii) In the case of a profit-sharing, stock bonus or rural 
cooperative plan--
    (A) The employee's attainment of age 59\1/2\; or
    (B) In accordance with section 401(k)(14), the employee's hardship;
    (iii) In accordance with section 401(k)(10), the termination of the 
plan; or
    (iv) In the case of a qualified reservist distribution defined in 
section 72(t)(2)(G)(iii), the date the reservist was ordered or called 
to active duty.
* * * * *
    (3) * * *
    (ii) * * *
    (B) Deemed immediate and heavy financial need. A distribution is 
deemed to be made on account of an immediate and heavy financial need 
of the employee if the distribution is for--
    (1) Expenses for (or necessary to obtain) medical care that would 
be deductible under section 213(d), determined without regard to the 
limitations in section 213(a) (relating to the applicable percentage of 
adjusted gross income and the recipients of the medical care) provided 
that, if the recipient of the medical care is not listed in section 
213(a), the recipient is a primary beneficiary under the plan;
    (2) Costs directly related to the purchase of a principal residence 
for the employee (excluding mortgage payments);
    (3) Payment of tuition, related educational fees, and room and 
board expenses, for up to the next 12 months of post-secondary 
education for the employee, for the employee's spouse, child or 
dependent (as defined in section 152 without regard to section 
152(b)(1), (b)(2) and (d)(1)(B)), or for a primary beneficiary under 
the plan;
    (4) Payments necessary to prevent the eviction of the employee from 
the employee's principal residence or foreclosure on the mortgage on 
that residence;
    (5) Payments for burial or funeral expenses for the employee's 
deceased parent, spouse, child or dependent (as defined in section 152 
without regard to section 152(d)(1)(B)), or for a deceased primary 
beneficiary under the plan;
    (6) Expenses for the repair of damage to the employee's principal 
residence that would qualify for the casualty deduction under section 
165 (determined without regard to section 165(h)(5) and whether the 
loss exceeds 10% of adjusted gross income); or
    (7) Expenses and losses (including loss of income) incurred by the 
employee on account of a disaster declared by the Federal Emergency 
Management Agency (FEMA) under the Robert T. Stafford Disaster Relief 
and Emergency Assistance Act, Public Law 100-707, provided that the 
employee's principal residence or principal place of employment at the 
time of the disaster was located in an area designated by FEMA for 
individual assistance with respect to the disaster.
    (C) Primary beneficiary under the plan. For purposes of paragraph 
(d)(3)(ii)(B) of this section, a ``primary beneficiary under the plan'' 
is an individual who is named as a beneficiary under the plan and has 
an unconditional right, upon the death of the employee, to all or a 
portion of the

[[Page 49658]]

employee's account balance under the plan.
    (iii) Distribution necessary to satisfy financial need--(A) 
Distribution may not exceed amount of need. A distribution is treated 
as necessary to satisfy an immediate and heavy financial need of an 
employee only to the extent the amount of the distribution is not in 
excess of the amount required to satisfy the financial need (including 
any amounts necessary to pay any federal, state, or local income taxes 
or penalties reasonably anticipated to result from the distribution).
    (B) No alternative means reasonably available. A distribution is 
not treated as necessary to satisfy an immediate and heavy financial 
need of an employee unless each of the following requirements is 
satisfied--
    (1) The employee has obtained all other currently available 
distributions (including distributions of ESOP dividends under section 
404(k), but not hardship distributions) under the plan and all other 
plans of deferred compensation, whether qualified or nonqualified, 
maintained by the employer;
    (2) The employee has provided to the plan administrator a 
representation in writing (including by using an electronic medium as 
defined in Sec.  1.401(a)-21(e)(3)), or in such other form as may be 
prescribed by the Commissioner, that he or she has insufficient cash or 
other liquid assets reasonably available to satisfy the need; and
    (3) The plan administrator does not have actual knowledge that is 
contrary to the representation.
    (C) Additional conditions. A plan generally may provide for 
additional conditions, such as those described in 26 CFR 1.401(k)-
1(d)(3)(iv)(B) and (C) (revised as of April 1, 2019), to demonstrate 
that a distribution is necessary to satisfy an immediate and heavy 
financial need of an employee. For example, a plan may provide that, 
before a hardship distribution may be made, an employee must obtain all 
nontaxable loans (determined at the time a loan is made) available 
under the plan and all other plans maintained by the employer. However, 
a plan may not provide for a suspension of an employee's elective 
contributions or employee contributions under any plan described in 
section 401(a) or 403(a), any section 403(b) plan, or any eligible 
governmental plan described in Sec.  1.457-2(f) as a condition of 
obtaining a hardship distribution.
    (iv) Commissioner may expand standards. The Commissioner may 
prescribe additional guidance of general applicability, published in 
the Internal Revenue Bulletin (see Sec.  601.601(d)(2) of this 
chapter), expanding the list of distributions deemed to be made on 
account of immediate and heavy financial needs and setting forth 
additional methods to demonstrate that a distribution is necessary to 
satisfy an immediate and heavy financial need.
    (v) Applicability date--(A) General rule. Except as otherwise 
provided in this paragraph (d)(3)(v), the rules in this paragraph 
(d)(3) apply to distributions made on or after January 1, 2020. For 
distributions made before January 1, 2020, the rules in 26 CFR 
1.401(k)-1(d)(3) (revised as of April 1, 2019) apply.
    (B) Options for earlier application. The rules in this paragraph 
(d)(3) may be applied to distributions made in plan years beginning 
after December 31, 2018, and the last sentence of paragraph 
(d)(3)(iii)(C) of this section (prohibiting the suspension of 
contributions as a condition of obtaining a hardship distribution) may 
be applied as of the first day of the first plan year beginning after 
December 31, 2018, even if the distribution was made in the prior plan 
year. Thus, for example, a calendar-year plan that provides for 
hardship distributions under the rules in 26 CFR 1.401(k)-
1(d)(3)(iv)(E) (revised as of April 1, 2019) may be amended to provide 
that an employee who receives a hardship distribution in the second 
half of the 2018 plan year will be prohibited from making contributions 
only until January 1, 2019 (or may continue to provide that 
contributions will be suspended for the originally scheduled 6 months). 
In addition, paragraph (d)(3)(ii)(B) of this section (listing 
distributions deemed to be made on account of an immediate and heavy 
financial need) may be applied to distributions made on or after a date 
that is as early as January 1, 2018.
    (C) Certain rules optional in 2019. If, in accordance with 
paragraph (d)(3)(v)(B) of this section, the rules in this paragraph 
(d)(3) are applied to distributions made before January 1, 2020, then 
the rules in paragraphs (d)(3)(iii)(B)(2) and (3) of this section 
(relating to an employee representation) and the last sentence of 
paragraph (d)(3)(iii)(C) of this section (prohibiting the suspension of 
contributions as a condition of obtaining a hardship distribution) may 
be disregarded with respect to such distributions.
* * * * *

0
Par. 4. Section 1.401(k)-3 is amended by:
0
1. Revising paragraph (c)(6)(v).
0
2. Removing the language ``, and, in the case of a hardship 
distribution, suspends an employee's ability to make elective 
contributions for 6 months in accordance with Sec.  1.401(k)-
1(d)(3)(iv)(E)'' in the fifth sentence in paragraph (c)(7), Example 
1(i).
0
3. Removing the second sentence in paragraph (j)(2)(iv).
    The revision reads as follows:


Sec.  1.401(k)-3  Safe harbor requirements.

* * * * *
    (c) * * *
    (6) * * *
    (v) Restrictions due to limitations under the Internal Revenue 
Code. A plan may limit the amount of elective contributions made by an 
eligible employee under a plan--
    (A) Because of the limitations of section 402(g) or 415;
    (B) Due to a suspension under section 414(u)(12)(B)(ii); or
    (C) Because, on account of a hardship distribution made before 
January 1, 2020, an employee's ability to make elective contributions 
has been suspended for 6 months.
* * * * *


Sec.  1.401(k)-6  [Amended]

0
Par. 5. Section 1.401(k)-6 is amended by:
0
1. Removing the fourth sentence in paragraph (2) of the definition of 
Eligible employee.
0
2. Removing the language ``, except as provided otherwise in Sec.  
1.401(k)-1(c) and (d),'' in the definitions of Qualified matching 
contributions (QMACs) and Qualified nonelective contributions (QNECs).

0
Par. 6. Section 1.401(m)-3 is amended by revising paragraph (d)(6)(v) 
to read as follows:


Sec.  1.401(m)-3   Safe harbor requirements.

* * * * *
    (d) * * *
    (6) * * *
    (v) Restrictions due to limitations under the Internal Revenue 
Code. A plan may limit the amount of contributions made by an eligible 
employee under a plan--
    (A) Because of the limitations of section 402(g) or section 415;
    (B) Due to a suspension under section 414(u)(12)(B)(ii); or
    (C) Because, on account of a hardship distribution made before 
January 1, 2020, an employee's ability to make

[[Page 49659]]

contributions has been suspended for 6 months.
* * * * *

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
    Approved: September 5, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-20511 Filed 9-19-19; 4:15 pm]
 BILLING CODE 4830-01-P