[Updated on April 17, 2020]

As temporary layoffs and furloughs become more prevalent during the COVID-19 outbreak, employers have been asking whether they may allow employees to take hardship distributions under their Section 401(k) plans for expenses and losses resulting from COVID-19.

Under the IRS hardship distribution final regulations, employers were permitted to add a new safe harbor hardship category that would allow an employee to take a hardship withdrawal to cover expenses and losses (including loss of income) incurred by the employee on account of a disaster declared by FEMA under the Stafford Act. To qualify, either the employee’s principal residence or place of employment must be in a disaster area designated by FEMA for individual assistance with respect to the disaster. Expenses and losses incurred by family members do not count for this purpose.

If the employer’s 401(k) plan incorporates the IRS safe harbor definition of hardship, employees whose principal place of residence or principal place of employment at the time of the disaster is in New York, Washington, California, Illinois, New Jersey, Texas, Louisiana, Michigan, and Massachusetts, (as of the date of this Blog) (collectively, the states listed in this sentence “Eligible States”) may take a hardship withdrawal from their 401(k) accounts for expenses and losses (including loss of income) incurred on account of the COVID-19 outbreak. At this time, employees whose principal place of residence or principal place of employment is in a state other than one of the Eligible States may not be eligible for a hardship withdrawal to cover expenses and losses from COVID-19 because FEMA has not declared such state to be a major disaster area. However, employees in these other states may be able to rely on other provisions of the IRS safe harbor to take a hardship withdrawal.  For example, the IRS safe harbor permits a hardship withdrawal to prevent eviction from the employee's principal residence or foreclosure on the mortgage on that residence.

Finally, the IRS could provide special disaster relief expanding the scope of the hardship.  For example, such relief could permit hardship withdrawals that would cover expenses and losses incurred by the employee’s family members as a result of COVID-19.

While hardship withdrawals for expenses and losses from COVID-19 may not be available to employees in all states, eligible employees in all states may now be eligible for distributions referred to as “coronavirus-related distributions”.  The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020, provides for coronavirus-related distributions to individuals who meet the requirements specified in the CARES Act.  For more information on these distributions and other employee benefit-related provisions of the CARES Act, please refer to the Client Advisory, which is available here.

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For more information about this post, please contact:

Sharon L. Lippett
New York
Rina Fujii
New York
Gretchen Harders
New York

 This document has been provided for informational purposes only and is not intended and should not be construed to constitute legal advice.  Please consult your attorneys in connection with any fact-specific situation under federal law and the applicable state or local laws that may impose additional obligations on you and your company.

IRS Circular 230 Disclosure

We inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of: (i) avoiding any tax penalty, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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