Do You Have a Hardship?

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

Ever since Congress changed the rules to allow plan hardship withdrawals, hardship distributions have been continually increasing among plan participants. There are six safe harbor expenses which the IRS deems to be an immediate and heavy financial need:

  1. Purchase of a principal residence
  2. College tuition
  3. Funeral expenses
  4. Eviction from principal residence
  5. Medical expenses
  6. Repair expenses of principal residence

Other purposes may also qualify if an immediate and financial need can be substantiated.

Although there are limited expenses under which a hardship distribution is allowed, these situations are becoming more prevalent in the current state of the economy.

Plans that allow for these require the participant to first exhaust all other types of withdrawals available. This is to save costs to the participant, as well as hopefully discourage the participant from using the funds for a non-necessity and regretting it in the future when retirement is upon them. A few things to consider prior to taking a hardship distribution are as follows:

  1. Hardship distributions are not loans; you are not required to pay them back.
  2. There is a 10 percent early withdrawal penalty if you are under the age of 59 ½.
  3. Financial proof must be provided to your employer.
  4. You cannot make contributions to the plan for a period of 6 months after the hardship withdrawal.
  5. The withdrawal must not exceed the amount necessary to support the need.

So before you consider taking a hardship withdrawal, talk to your accountant, financial planner or another trusted adviser.

By Leslie A. Lee, CPA