Hardship Withdrawals Climb 40%

Nearly a year and a half after passage of the Bipartisan Budget Act of 2018, Fidelity has evidence of a significant spike in hardship withdrawals.

“It makes sense that we would see this trend,” says Kevin Barry, president of workplace investing at Fidelity. “The law changed the rules for 401(k) loans and hardship withdrawals, making it easier to draw the money directly as a hardship without first getting involved in the loan process.”

As provided in the budget act, participants of 401(k) or similar tax-qualified retirement plans may take a hardship distribution from their account without first exhausting any available loan from the plan.

Further, the act expanded the types of contributions and earnings a plan may make available for hardship distributions. And it directed the IRS and Treasury Department to eliminate the safe harbor requirement barring participants from contributing to their plan for six months while the validity of their request was judged—i.e., was the distribution needed to satisfy an immediate and heavy financial need?

“As a result of this change in incentives, we’ve seen a clear shift,” Barry says. “Loans are down 7%, so far, and hardship withdrawals are up 40%. This is a big issue.”

While correlation does not equal causation, it should be observed how the trend of greater claiming of hardships comes at a time when the U.S. economy and job market are healthy. And, in Barry’s assessment, the drop in the rate of participants taking loans is in itself demonstrative.

He also notes that the change in the law was created with good intentions, relating to the hurricane disasters of recent years and the need for millions of Americans to access liquid funds.

“Moving forward, this is a topic we are looking at closely, and we’re already talking to a lot of our clients about [it],” he says