401(k) / 403(b) Plans - Selected Developments

This is to update you on certain recent developments pertaining to 401(k) and 403(b) plans, which may affect your plan operations and plan document.

Disputes Concerning Whether A Participant Is Disabled

The New Rule

Effective as of April 1, 2018, potential new claims and appeals procedures exist for situations in which there is a dispute regarding whether a participant has met a plan’s definition of a disability.

These new rules apply not only to disability plans but also to retirement plans and non-qualified deferred compensation plans. The new rules do not apply to non-ERISA 403(b) plans (i.e. governmental and church 403(b) plans).

The Exception

An exception exists to these rules for retirement and deferred compensation plans that defined disability by looking to an “outside source” (i.e. by looking to the Federal Social Security Administration or to a disability income policy), so that there is no discretion on the part of the employer, are not subject to the new rules.

If a given plan designee (i.e. depending on the definition of disability) is required to meet the new rules, the new rules impose certain additional requirements pertaining to processing disability claims and appeals.

Potential Need to Amend the Plan

These new rules may require a plan amendment. If you have not done so already, please contact your document provider concerning this topic.

Casualty Loss As a Hardship Withdrawal

As a result of some recent legislation, a casualty loss for hardship withdrawal purposes is permitted only if the casualty occurred in a federal disaster area. This change resulted from certain Internal Revenue Code changes which were not intended to (but did) affect the 401(k)/403(b) hardship withdrawal rules. It is hoped that this unintended result will eventually be reversed.

Potential New Rules Pertaining to Hardship Withdrawals

Recent legislation contains new rules pertaining to hardship withdrawals that will be effective in 2019, not 2018. These rules include:

• A participant does not have to take a plan loan prior to taking a hardship withdrawal.
• A participant’s ability to make elective deferral contributions does not have to be suspended for six months after taking a hardship withdrawal.
• Hardship withdrawals can now include earnings on elective deferral contributions.
• Hardship withdrawals are now permitted from sources that were previously not permitted, which means that hardship withdrawals may now be taken from safe harbor monies.

Some uncertainty exists concerning the above new rules. For the most part, it appears that these rules are voluntary, and not mandatory. Some employers may decide to adopt some, but not all, of the above new rules. Also, some of the above new rules may require additional IRS guidance and/or legislative action before we can understand the rules’ full ramifications.

Tom Horton is a partner with Barrett McNagny, concentrating his practice in the area of employee benefits. He has extensive experience working with employers on 401(k) and 403(b) plans. 

Bob Kistler has over a decade of experience, concentrating his practice in the area of employee benefits and ERISA compliance and litigation. He can be reached at 260-423-8873 or at rwk@barrettlaw.com.