Like loans, hardship withdrawals
are allowed by law, but your employer is not required to provide for
them in your plan. Again, most companies do, but some don’t. The
cost of administering such a program can be prohibitive for many
small companies. Check with your Human Resources department if
you’re not sure if your plan allows hardship withdrawal. Like loans,
your employer must adhere to some very strict and detailed
The IRS code that governs 401k plans provides for hardship
withdrawals only if: (1) the withdrawal is due to an immediate and
heavy financial need; (2) the withdrawal must be necessary to
satisfy that need (i.e. you have no other funds or way to meet the
need); (3) the withdrawal must not exceed the amount needed by you;
(4) you must have first obtained all distribution or nontaxable
loans available under the 401k plan; and (5) you can’t contribute to
the 401k plan for six months following the withdrawal.
The following six items are considered by the IRS as acceptable
reasons for a hardship withdrawal:
Un-reimbursed medical expenses for you, your spouse, or
Purchase of an employee’s principal residence.
Payment of college tuition and related educational costs such as
room and board for the next 12 months for you, your spouse,
dependents, or children who are no longer dependents.
Payments necessary to prevent eviction of you from your home, or
foreclosure on the mortgage of your principal residence.
funeral expenses, and
repair of a primary
Hardship withdrawals are subject to income tax and, if you are not
at least 59½ years of age, the 10% withdrawal penalty. You do not
have to pay the withdrawal amount back.
Plan participants may stop contributing to the plan at anytime, but may
not receive a distribution from the plan prior to age 59½ other than in
the form of a loan, a hardship withdrawal, or early retirement (often at
age 55 with 10-years of service).
For a participant to receive a distribution (prior to age 59½) a ‘distributable
event’ must occur such as retirement, death, disability, or
employment termination. When an employee is terminated they have several
options including depositing the assets to an conduit IRA, rollover to
another employer retirement plan, or taking the cash and paying the
penalties and income tax.
For Professional Consultation Services Contact:
Executive Benefit Plans, Inc.
1186 Route 56 East
Apollo, PA 15613-9725 USA
Phone: 800-622-2411 or Fax: 724-478-1688
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provided for review and consideration only. Please consult legal and tax
practical advice pertaining to your business and personal situations.
This page was last reviewed and/or updated
Friday, July 03, 2015 05:21 PM