One of the more curious results of the failure of the Bipartisan Budget Act of 2018 to amend 403(b)(11) to provide for the same hardship relief that was granted to 401(k) plans is that the “hardship” distribution of 403(b) QNECs and QMACs aren’t really hardship distributions.

This has a very real practical and operational effect.

The IRS describe the rule  well in its preamble to their proposed regulation on the new hardship distribution rule:

“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 § 1.401(k)– 1(d)(3); thus, the proposed new rules relating to a hardship distribution of elective contributions from a section 401(k) plan generally apply to section 403(b) plans. HOWEVER (emphasis mine) Code section 403(b)(11) was not amended by section 41114 of BBA 2018; therefore, income attributable to section 403(b) elective deferrals continues to be ineligible for distribution on account of hardship.”

This means that

“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 § 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.”

This also means that a 403(b) QNEC and QMAC distribution is NOT accomplished under 403(b)’s hardship distribution rules. Instead, it is made under Reg 1.403(b)-6(b), under which amounts NOT attributable to elective deferrals can be distributed. The rule, under the 2007 regulations, is that such amounts in an annuity contract can be distributed upon the occurrence of a “stated event.” The plan can choose this “stated event” to be a number of things, including the attainment of a certain age or upon disability. It is simply a permitted in-service withdrawal, not a hardship distribution.

This seems to me to have at least four operational effects:

  1. First, it means that these amounts CAN be rolled over, unlike a 403(b)(11) distribution of elective deferrals, which cannot be rolled over.
  2. Secondly, the plan document language which will need to be amended is NOT the hardship section. Rather, it is the in-service withdrawal section of the plan document.
  3. Thirdly, and related to #2, the “financial need,” “deemed hardship” and other rules required of hardship distributions by statute or regulation will not apply as a matter of law, but only as a matter of chosen plan operational rules-which also gives you flexibility on the design of the plan language.
  4. Finally, the 402(f) notice needs to properly identify the tax attributes of this type of distribution, that is, that it can be rolled over.

This is what I could flush out as being the differences, but I also invite you to explore whether or not there are any other practical ramifications arising from this treatment. It is possible that it could impact things like disaster relief or other such provisions in the future, which calls for special treatment of hardship distributions-because this is, simply, not a hardship distribution.