Retirement savers in the United States ended 2024 with account balances at all-time highs, driven by strong equity markets, even as a growing share of participants tapped their 401(k) plans early through hardship withdrawals. The tension between rising balances and rising leakage sits at the center of a policy experiment that began with the Bipartisan Budget Act of 2018, which loosened the rules governing when workers can pull money from their retirement accounts. At the same time, Federal Reserve survey data show that 37 percent of households still could not cover a $400 emergency expense with cash or its equivalent, a figure that helps explain why easier access to retirement funds has translated into more withdrawals rather than fewer.
Easier 401(k) Access Collides with Persistent Household Liquidity Gaps
The Bipartisan Budget Act of 2018, through sections 41113 and 41114, directed the IRS to rewrite the rules for 401(k) hardship distributions. The most significant change eliminated the longstanding requirement that participants first take a plan loan before requesting a hardship withdrawal. The IRS published final regulations in Internal Revenue Bulletin 2019-41, codifying these changes and giving plan sponsors a clear framework for implementation. By removing the loan-first hurdle, Congress made it faster and simpler for workers facing immediate financial need to access their own savings, but that speed also reduced the friction that once discouraged early withdrawals.
The regulatory shift landed in an economy where millions of households carry thin cash buffers. The Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2024, known as the SHED, found that 63 percent of households would cover a hypothetical $400 emergency using cash or its equivalent. That means more than a third of respondents would need to borrow, sell something, or simply go without. For workers who have a 401(k) but lack liquid savings, the post-2018 rules created a direct path from retirement account to emergency spending, with no plan loan standing in the way.
What the Regulatory Record and Survey Data Actually Show
Two primary sources anchor the factual picture. The IRS 401(k) Resource Guide confirms that the Bipartisan Budget Act of 2018 mandated changes to hardship distribution rules, and the final regulations published in Bulletin 2019-41 spell out how those changes work in practice. The loan-first requirement is gone. Plans may also now allow participants to withdraw employer matching contributions and earnings on elective deferrals for hardship purposes, broadening the pool of accessible dollars.
The Federal Reserve’s SHED survey, conducted in late 2024, supplies the demand-side picture. The 37 percent of households unable to handle a $400 shock with cash represents a persistent vulnerability. That share has improved from its worst readings earlier in the decade, but it still describes tens of millions of adults living close to a financial edge. When those adults also participate in a workplace retirement plan, the relaxed hardship rules create a release valve that did not exist in its current form before 2019.
What neither source provides is a direct count of how many hardship withdrawals have occurred since the BBA changes took effect. Instead, policymakers and plan sponsors must infer behavior from partial indicators: recordkeeper reports, plan-level data, and the broader context of household balance sheets. Those fragments all point in the same direction. More participants are reaching into their 401(k)s to cope with medical bills, housing costs, and other immediate pressures, even as their remaining balances benefit from market gains.
How Plan Design and Administration Shape Outcomes
The new rules are not self-executing; employers and plan providers decide how fully to adopt them. Some sponsors have chosen to allow the broadest possible access to contributions and earnings for hardship purposes, while others have kept tighter internal limits or emphasized loan options and emergency savings tools instead. The IRS supports these decisions through its online account services for taxpayers and practitioners, which help ensure that plans applying the hardship rules stay compliant with contribution and distribution requirements.
Compliance also depends on accurate plan documents and timely corrections when errors occur. The IRS maintains a searchable body of official guidance that employers and advisors use to interpret hardship standards, safe harbors, and documentation expectations. Together with the 2019 regulations, this guidance gives plan fiduciaries a roadmap for balancing access and preservation: they can verify that withdrawals meet the definition of an immediate and heavy financial need, while avoiding unnecessary barriers that might push workers toward high-cost credit instead.
Yet even the best-designed plan cannot resolve the underlying liquidity problem revealed in the SHED data. As long as a large minority of households lack even a few hundred dollars in ready cash, retirement accounts will continue to double as de facto emergency funds. That dual role may be rational for individual workers facing urgent bills, but it undermines the long-term purpose of tax-advantaged savings and raises the risk that today’s shortfall becomes tomorrow’s inadequate retirement income.
Policy Trade-Offs and the Road Ahead
The experience since 2018 highlights a difficult policy trade-off. Stricter hardship rules and higher frictions would likely reduce leakage from 401(k) plans, supporting better retirement readiness on paper. But they would also trap some workers in untenable financial situations, forcing them toward payday loans, credit card debt, or eviction rather than allowing them to draw on their own savings. Looser rules, by contrast, respect participant autonomy and provide a crucial safety valve, but at the cost of shrinking the nest eggs that many households will depend on later in life.
Future reforms are likely to focus less on reversing the access changes and more on building parallel buffers that reduce the need for hardship withdrawals in the first place. Automatic enrollment into short-term emergency savings accounts, clearer communication of the long-run cost of early withdrawals, and employer matches that favor retention of assets are all tools under discussion in policy circles. For now, however, the data point to an uneasy equilibrium: record retirement balances on average, persistent financial fragility for a large minority, and a 401(k) system increasingly asked to serve both as an emergency fund and as a vehicle for old-age security.
David M. Keller is a finance writer based in Columbus, Ohio, covering personal finance and consumer-focused economic topics. He earned his degree in journalism from Ohio University and began his career reporting on local business and economic trends for a regional media outlet. Since then, he has contributed to a variety of online publications, focusing on clear, practical coverage of topics such as cost of living, debt, and everyday financial decision-making.
