AICPA Says Tax Reform Law Adversely Affects 401(k) Hardship Distributions

The American Institute of CPAs (AICPA) has requested that the Department of the Treasury and the Internal Revenue Service (IRS) provide immediate guidance to correct the effect that the Tax Cuts and Jobs Act (TCJA) has had on the ability of 401(k) plans and 403(b) arrangements to issue hardship distributions for casualty losses.

The AICPA explained it its letter (attached) that the TCJA amended Internal Revenue Code section 165 to narrow the definition of the term “casualty” for purposes of the casualty loss deduction. Under the amended section 165(h), losses resulting from casualties from 2018 through 2025 are only deductible if the casualty occurs in a federally declared disaster area. Consequently, the qualification criteria related to hardship distributions from 401(k) plans and 403(b) arrangements are limited to those occurring in federally declared disaster areas as well from 2018 through 2025.

“We recommend that Treasury and the IRS issue guidance permitting an individual who suffers a casualty loss that would have qualified under the rules of section 165(h) prior to their amendment by the TCJA, to continue to qualify for a hardship distribution from their 401(k) plan, as well as from elective deferrals made to a 403(b) arrangement,” the AICPA wrote.

“There is no indication that Congress intended to restrict the hardship distributions from 401(k) plans or 403(b) arrangements when amendments were made to section 165,” the AICPA stated. “The IRS and Treasury are not required to tie hardship distributions from 401(k) plans or 403(b) arrangements to the criteria in section 165(h) as amended. Therefore, we recommend that the IRS and Treasury define a casualty loss for purposes of the hardship distribution safe harbor by using a standard other than the standard under section 165 as amended by the TCJA.”