ML BeneBits

UPDATED March 24, 2020

The following states have been declared major disaster areas and, where indicated, are eligible for the Federal Emergency Management Agency’s (FEMA’s) Crisis Counseling Program, which FEMA identifies as a form of individual assistance:

* Unlike the announcements regarding the other states identified in this chart, FEMA's announcement of Iowa as a major disaster area did not include any reference to the Crisis Counseling Program or other individual assistance being available at this time. However, this does not preclude FEMA from identifying individual assistance that is available in Iowa at a later date.

At this juncture, FEMA has not identified any states or counties as eligible for individual financial assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the Stafford Act). However, the Stafford Act identifies a number of assistance programs (including the Crisis Counseling Program) that FEMA characterizes as "individual assistance" in its March 2019 Individual Assistance Program and Policy Guide.

The applicable Treasury regulations provide that a hardship distribution can be made available for expenses and losses (including loss of income) in connection with a disaster declared under the Stafford Act "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." Consequently, as described in our blog post as updated below, FEMA's declaration that a state is eligible for the Crisis Counseling Program or other individual assistance means that certain plan participants who are living and working in that state may be eligible for “deemed” hardship distributions from their plan accounts.

Please note that FEMA continuously issues updates regarding disaster declarations and available public and individual assistance for such declarations. This blog post is updated for FEMA announcements as of March 24, 2020. For more up-to-date information about announcements and developments after such date, please see the FEMA website.

UPDATED March 21, 2020

Late in the evening of March 20, 2020, the US government declared that a continuing "major disaster" exists in New York state. In addition to making certain federal assistance available to the state, this declaration means that defined contribution plan participants can be eligible for a "deemed" hardship distribution from their plan account (as described in our original post below) if they work or live in the state. More specifically, if a defined contribution plan has adopted the Federal Emergency Management Agency (FEMA) declared disaster hardship withdrawal opportunity, a participant in the plan whose principal place of employment or principal residence is in New York state can obtain a hardship withdrawal for expenses or losses incurred by the participant or the participant's family.

It should be noted that defined contribution plans are not required to provide a hardship withdrawal right, and, even when hardship withdrawals are made available, the plan can limit the circumstances under which participants will qualify the withdrawal. However, in our experience, the substantial majority of defined contribution plans allow for hardship withdrawals and, similarly, permit hardship withdrawals for expenses and losses due to federally declared disasters. Thus, this development is likely to provide welcome relief to New York state residents and employees in New York state who are affected by the coronavirus (COVID-19).

Although the March 20, 2020, disaster declaration is currently limited to New York state, logic suggests that additional states will be subject to similar declarations as the COVID-19 pandemic continues to spread. We will update the table below as events continue to develop.

During the economic upheaval caused by coronavirus (COVID-19), defined contribution plan participants (i.e., participants in 401(k) plans, 403(b) plans, etc.) may look to their plan account balances to alleviate financial challenges. In particular, participants may be asking plan sponsors if they can take hardship distributions due to the COVID-19. At this juncture, no special COVID-19 rules or guidance have been issued by Congress or the IRS that apply to retirement plans on hardship distributions of elective deferrals from retirement plans. As such, participants and plan sponsors are left to navigate these difficult waters using the existing rules applicable to qualified defined contribution plans. However, that does not mean plans are without certain tools.

Here are a few things that plan sponsors should consider:

• Economics hardships stemming from COVID-19 may qualify as a hardship under existing hardship standards. Under existing law, a distribution from a 401(k) account due to hardship may be allowed if an “immediate and heavy financial need” exists. There are seven “deemed hardship criteria” that are considered to automatically satisfy the “immediate and heavy financial need” test, which include: expenses for medical care, costs of purchasing a principal residence, payment of tuition and room and board for post-secondary education, payments to avoid an eviction from or foreclosure on a principal residence, burial or funeral expenses, expenses incurred to repair damages to a principal residence, and expenses and losses caused by federally declared disaster under certain circumstances. It is conceivable that many participants would qualify for some of the deemed hardship criteria due to COVID-19, such as the need to prevent eviction or incurring expenses for medical care.

• If COVID-19 is declared to be a federal disaster, then financial needs stemming from COVID-19 automatically may qualify under existing hardship standards. One of the deemed hardship criteria allows for a distribution if expenses and losses are incurred due to a federally declared disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the Stafford Act). Although COVID-19 was declared a “national emergency” under the Stafford act earlier this month, that declaration fell short of designation as a federally declared disaster with the result that financial need caused by COVID-19 alone cannot be “deemed” to be eligible for a hardship withdrawal. However, as noted above, the US government declared that a major disaster exists in New York state, and other states and areas may soon follow.

• Plan sponsors could expand their hardship criteria to consider “facts and circumstances” hardships that may cover certain COVID-19-related hardships. Most plans provide hardships that satisfy the “deemed” hardship criteria described above. However, the regulations allow a plan to provide for individualized analysis of a participant’s “immediate and heavy financial need,” such that each participant’s financial circumstances can be evaluated to provide certain financial relief even if the enumerated circumstances do not exist. A participant’s immediate and heavy financial need can be determined based on “all relevant facts and circumstances,” which means that plan administrators may provide broader protection than what is allowed under the deemed hardship criteria. In the past, many plan sponsors declined to offer this individualized approach because of the administrative burdens and the difficulty in evaluating hardship withdrawal requests. However, plan sponsors may want to revisit this individualized approach when considering how to help employees cope with the unprecedented COVID-19 global pandemic. 

In addition to hardship withdrawals, plan sponsors may want to consider offering more expansive in-service withdrawal opportunities for other types of retirement contributions (e.g., matching contributions, rollover contributions, other employer contributions, etc.). In general, these types of contributions are not subject to the detailed hardship withdrawal rules and requirements described above (though certain requirements may still apply). 

Lastly, it is possible that pending or future legislation or other regulatory updates may further expand or relax requirements relating to hardships or other in-service withdrawals. 

Please contact the authors or your Morgan Lewis contacts if you have any questions about hardship withdrawals in the midst of coronavirus COVID-19. For updated information about COVID-19, please see our resource page.