Satterthwaite Reviews Penalizing Precarity By Maynard & Wallace

Emily Satterthwaite (Georgetown; Google Scholar), Hardship Withdrawals from 401(k)s: A Trap for the Unwary (JOTWELL) (reviewing Goldburn P. Maynard, Jr. (Indiana-Kelley; Google Scholar) & Clinton Wallace (South Carolina; Google Scholar), Penalizing Precarity, 123 Mich. L. Rev __ (2024))::

Those who are committed to strengthening safety nets for economically precarious workers at modest revenue cost should look no further than Goldburn Maynard and Clint Wallace’s paper on hardship-related early withdrawals by employees from their 401(k)/403(b) qualified retirement plans. Employees who need to make an early withdrawal due to hardship are, by definition, encountering difficulties and have lower ability to pay. Nonetheless, as Maynard and Wallace describe, a subset of hardship distributees may be surprised by a mismatch in the law that can heap further hardship upon them in the form of penalties.

The mismatch occurs between two sets of rules: first, the “hardship distribution” rules addressed to qualified plans under Code subsection 401(k), which allow a plan administrator to permit withdrawals before the employee reaches retirement age and, second, the rules addressed to taxpayers under Code subsection 72(t), which apply a 10 percent “early withdrawal” penalty.

The regulations under 401(k) list various safe harbored-payments that constitute an allowable hardship distribution in response to “immediate and heavy financial need” that cannot be satisfied using other resources. (Pp. 3-4.) These payments include those for medical care that would be deductible under Code subsection 213(d), costs related to the purchase of a home for the employee, tuition expenses for post-secondary education, as well as payments to prevent eviction or foreclosure, for funeral expenses, and for a natural disaster or casualty loss. (Pp. 3-4, 26.) However, those same safe harbored-payments are not fully mirrored in the subsection 72(t) penalty framework, which contains a divergent list that doesn’t include eviction and foreclosure, limits qualifying medical care expenses, and allows payment for post-secondary educational expenses only in the case of individual retirement account holders, not those who have 401(k)/403(b) qualified plans. (Pp. 30-31.) As a result, some hardship distributees fall between the cracks: “[d]espite qualifying for the hardship distribution safe harbor, [they can avail themselves of] no exception to this separate penalty…” (P. 4.)

This mismatch might seem like a minor issue likely to affect few employees, but those who are affected constitute a group that has revealed itself to be struggling to make ends meet. ...

The article concludes by linking the maladies of the qualified plan hardship distribution regime with the larger themes of complexity, uncertainty, and unworkability in U.S. retirement saving policy for those with lower incomes. As the authors point out: “401(k) plans have been designed with an expectation that individuals can make and stick with long-term commitments, consider the time value of money, evaluate different investment options, and shoulder the burden of significant uncertainty about their investment decisions and their future preferences—all dubious expectations in the real world.” (P. 19.) Few will come away from this work unconvinced that low-income employees, and particularly those who are experiencing hardship, are poorly-served by the status quo retirement savings system.

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