Hardship Withdrawal

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Hardship Withdrawal

A withdrawal from a retirement account such as a 401(k) or an IRA made before the age of 59 1/2 because of financial need. In order to make a hardship withdrawal, one must demonstrate the financial need, such as the need to pay medical bills or tuition for college. Even so, a hardship withdrawal is usually subject to a penalty tax.

Hardship withdrawal.

A hardship withdrawal, also known as a hardship distribution, occurs when you take money out of your 401(k) or other qualified retirement savings plan to cover pressing financial needs.

You must qualify to withdraw by meeting the conditions your plan imposes in keeping with Internal Revenue Service (IRS) guidelines. For example, you may have to demonstrate how urgent the situation is and prove you have no other resources.

Some allowances are purchasing your primary home, covering out-of-pocket medical expenses for yourself or a dependent, and paying college tuition for yourself or a dependent.

However, if you're younger than 59 1/2, you must pay a 10% penalty plus income tax on the amount you withdraw. You also may not be permitted to contribute to the plan again for six months.

Hardship Withdrawal

A withdrawal from a section 401(k), section 403(b), or section 457 plan that is permitted when the plan participant has an immediate and heavy financial need and the withdrawal is necessary to meet that need.

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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?

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In addition, elective deferrals were the only contributions eligible for hardship distributions. Earnings on those deferrals and most qualified non-elective contributions (QNECs) and qualified matching contributions (QMACs), were excluded.

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The law also modifies the rules for hardship distributions, directing the IRS to eliminate for plan years beginning after Dec.

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Hardship distributions from an EBP are intended to be a last resort for participants.

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Failure to handle financial hardship distributions properly, including cessation of deferrals for the balance of the plan year as required;

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The Profit Sharing 401k Council of America surveyed plans at 931 companies with 8.6 million participants and found that nearly 100% of hardship distributions were tied to situations to save a home.

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Hardship distributions are permitted to the extent the deemed hardship requirements described in Treasury regulation section 1.401(k)-1(d)(3)(iii)(B) and (iv)(E) are satisfied.

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Examples of such discretionary determinations are authorizing plan-to-plan transfers, processing distributions, satisfying applicable qualified joint and survivor annuity requirements, and making determinations regarding hardship distributions, qualified domestic relations orders (QDROs), and eligibility for or enforcement of loans.

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Higher employee contributions are the draw of 401(k)s, as are the plans' flexibility Employee contributions rose to $15,500, or $20,500 for workers 50 and older, in 2007 and plans allow for delayed vesting, eligibility requirements, hardship distributions and employer contributions based on profit sharing or other formulas.

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Such capabilities make the plan attractive for younger executive participants and help overcome stricter 409A limitations on hardship distributions.

409A rules offer opportunities for attractive new plan design features: 409A is the most dramatic change in the income taxation of executive comp in 25 years