Over the past several years, federal legislation and agency guidance permitted employers to add flexibility and higher contribution limits into their cafeteria plans. In addition, final regulations relaxed the hardship distribution rules for 401(k) and 403(b) plans; and other final regulations addressed the use of a market rate of return in certain cash balance/hybrid defined benefit plans.

The deadline for adopting amendments to reflect these changes is December 31, 2021.

Cafeteria Plan Amendment

As discussed in prior DWT blog posts, a number of cafeteria plan changes were permitted in recent years:

  • Beginning in 2020, costs of over-the-counter drugs and menstrual products can be reimbursed from a health flexible spending account as described here.
  • Mid-year changes to medical elections for any reason in 2020; expanded use of unused flexible spending account amounts in 2020; and, beginning in 2020, increase permitted carryover amount for flexible spending accounts to $550 based on inflation as described here.
  • For 2020 and 2021, expanded flexible spending account carry-overs and extended grace period and spend down period; for 2021 only, election changes permitted for any reason and age to access dependent care flexible spending account reimbursements extended to age 14 as described here.
  • Increased dependent care contribution limit for 2021 only as described here.

Cafeteria plan sponsors who permitted any of these changes in practice should reach out to their cafeteria plan administrators and legal counsel as soon as possible to make sure their plan is amended by December 31, 2021.1

401(k)/403(b) Plan Amendment

As a result of the issuance of final regulations, the rules surrounding hardship distributions from 401(k) and 403(b) plans have changed over the past few years as follows:

  • Hardship withdrawal may include:
    • Earnings on elective deferrals;2
    • Qualified nonelective contributions; and
    • Qualified matching contributions.
  • Mandatory repeal of the six-month suspension of deferrals after taking a hardship distribution.
  • Optional removal of the requirement to take an available plan loan prior to a hardship distribution.
  • Clarification of changes made under prior legislation which enabled distributions on account of a participant's designated beneficiary's uninsured medical expenses, tuition/educational expenses, and burial/funeral costs.
  • Clarification that a hardship distribution can be taken for a casualty loss not tied to a federally declared disaster.
  • Optional new safe harbor standard for expenses and losses on account of a disaster declared by the Federal Emergency Management Agency (FEMA), provided the participant's principal place of residence or employment at the time of the disaster was located in an area designated by FEMA for individual assistance with respect to the disaster.
  • Mandatory change to the standard for determining whether a distribution is necessary to satisfy a financial need:
    • Distribution may not exceed the amount of a participant's need (including any amounts necessary to pay any taxes/penalties).
    • Employee must have obtained other available distributions under the employer's plans.
    • Employee must represent she or he has insufficient cash or other liquid assets to satisfy the financial need.

401(k) and 403(b) plans with hardship provisions must be amended by December 31, 2021, to incorporate the two mandatory changes noted above (which are effective no later than January 1, 2020) as well as any of the optional changes the plan sponsor implemented. Employers should check with their plan document provider and legal counsel to confirm the hardship provisions in their 401(k) plan or 403(b) will be timely amended.

Cash Balance/Hybrid Defined Benefit Plan Amendment

Final regulations were also issued with respect to cash balance/hybrid defined benefit plans maintained pursuant to one or more collective bargaining agreements ratified on or before November 13, 2015. Any such plan must be amended by December 31, 2021, to comply with the final regulations regarding the market rate of return and other portions of the regulations that first applied to the plan for the plan year beginning on or after the later of:

  • January 1, 2017; or
  • The earlier of:
    • January 1, 2019; or
    • The date on which the last of those collective bargaining agreements terminates (without regard to any extension thereof on or after November 13, 2015).

Persons responsible for collectively bargained cash balance/hybrid defined benefit plan documents should make sure any amendments necessary to bring the plan document into compliance with the final regulations are adopted before 2021 year-end.

If you have any questions about or need assistance with any of these 2021 year-end amendments, please contact your DWT employee benefits attorney.


1 If a health flexible spending account reimbursed the costs of over-the-counter drugs and menstrual products in 2020, we recommended the cafeteria plan be amended to so provide by December 31, 2020. However, if the health flexible spending account did not start reimbursing these costs until 2021, the amendment should be adopted by December 31, 2021.

2 May not include earnings on elective deferrals to a 403(b) plan.