The tax reform legislation signed into law by President Trump on December 22, 2017 changed which expenses qualify for the casualty deduction for hardship definition purposes for 401(k) and 403(b) plans. For taxable years between 2018 and 2025, the Act limits casualty deductions to expenses related to damage to the employee’s principal residence that is attributable to a disaster declared by the President.
While your retirement plan is designed for long-term savings, should an unexpected or costly event leave you exploring alternative financing options, you may have access to plan funds under “Financial Hardship Distribution” criteria outlined in your plan. Not all retirement plans grant “financial hardship distributions.” However, if a plan does, the common eligible hardships are defined as:
- Medical care expenses (described in Section 213(d) of the Internal Revenue Code)
Expenses previously incurred or necessary to obtain medical care by you, your spouse, your dependents, or your beneficiaries
- Educational fees
Tuition-related fees, and room and board expenses for the next twelve months of post-secondary education for yourself, your spouse, your dependents, or your beneficiaries
- Funeral or burial expenses
Payments required for the funeral or burial of your deceased parent, spouse, child, dependents, or beneficiaries
- Purchase of principal residence
Costs directly related to the purchase of your principal residence, excluding mortgage payments
- Prevention of eviction or foreclosure on principal residence
Costs necessary to prevent your eviction from or the foreclosure on the mortgage of your principal residence
- Casualty loss/Damage repair to your principal residence
Costs for the repair of damage to your principal residence, which would qualify for the casualty deduction under the Internal Revenue Code
If your plan allows for hardship distributions and you incur one or more of the above expenses, a hardship distribution may be made for amounts attributable to your salary deferrals, if you certify and agree that all of the following conditions are satisfied:
- The distribution is not in excess of the amount required for your immediate and heavy financial need. The financial need may include any amounts necessary to pay federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution.
- You have obtained all distributions, other than hardship distributions, and all nontaxable loans currently available under all plans that your Employer maintains.
- You will not make any salary deferrals for at least six months after receiving the hardship distribution. If your salary deferrals are suspended, your deferral election that was in place prior to the suspension will be terminated, and you will be required to prepare a new deferral election.
If you have questions about your retirement plan and distribution eligibility due to a financial hardship, please contact Kassouf & Co.
Jill Patton, Benefits Administrator, Kassouf Retirement Plan Services
Jean West, Benefits Administrator, Kassouf Retirement Plan Services