Typically, retirement plan sponsors intend for the funds contained in a retirement plan to be held until the participant retires. Under some circumstances, a participant may need the money now. Some retirement plans – like 401(k) plans, 403(b) plans, and 457(b) plans – allow participants to receive hardship distributions, though they are not required to do so. In this article, we will examine some common questions about hardship distributions.
When can a retirement plan authorize a hardship distribution?
The employee must show an “immediate and heavy financial” need when asking for a hardship distribution. Per the IRS, the following expenses may be meet that criteria:
- Certain medical expenses;
- Costs relating to the purchase of a principal residence;
- Tuition and related educational fees and expenses;
- Payments necessary to prevent eviction from, or foreclosure on, a principal residence;
- Burial or funeral expenses; and
- Certain expenses for the repair of damage to the employee’s principal residence.
The hardship distribution request may be denied if the employee has access to other resources.
How much can be distributed?
The plan may provide for other amounts to be available for hardship distributions.
Generally, the employee cannot withdraw more than he or she needs. For example, an employee who needs $2,000 for tuition expenses because financial aid commitments did not come through probably will be limited to a $2,000 withdrawal.
What types of retirement plans can give hardship distributions?
Generally, only 401(k) plans, 403(b) plans, and 457(b) plans allow for hardship distributions. Even then, it’s important to know what the plan itself requires for this type of disbursement.
Does the participant repay the hardship distribution?
Typically, the employee does not repay the distribution. Instead, the amount is permanently deducted from the employee’s account.
Is there a penalty on a hardship withdrawal?
It depends. Certain hardship withdrawals are not subject to the additional 10% early withdrawal tax. However, certain expenses, such as those related to higher education expenses, are subject to a 10% early withdrawal tax (in addition to all applicable ordinary income taxes).
Learn More About Your Retirement Plan Hardship Distributions.
As sometimes happens, there may be exceptions to hardship distribution rules. As an employer or plan sponsor, it’s critical that you know and understand how the law applies to such distributions.