Hardship Distributions From 401(k) Plans

Generally speaking a hardship distribution from a 401(k) can be made if there is an immediate and heavy financial need of the employee, the employee’s spouse, or the employee’s dependent.

Whether a need is immediate and heavy depends on facts and circumstances. The law and Treasury Regulations provide that certain expenses are assumed to be immediate and heavy. For example:

1. certain medical expenses;
2. costs relating to the purchase of a principal residence;
3. tuition and related educational fees and expenses;
4. payments necessary to prevent eviction from, or foreclosure on, a principal residence;
5. burial or funeral expenses; and
6. certain expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under Internal Revenue Code Section 165.

A distribution is not considered necessary to satisfy an immediate and heavy financial need of an employee if the employee (or the employee’s spouse or minor child) has other resources available to meet that need.

Under proposed regulations a plan administrator has the option of including or excluding the requirement that the employee first obtain a plan loan prior to requesting a hardship distribution.

Hardship withdrawals are subject to income tax and, if the plan participant is less than 59½ years of age, the 10% withdrawal penalty. However, the amount required to satisfy the financial need can include amounts necessary to pay any taxes or penalties that may result from the distribution. A hardship distribution may not exceed the amount of the need.

If a 401(k) plan provides for hardship distributions, it must lay out the specifics. For example, a particular 401(k) plan may provide that a hardship distribution can be made for medical expenses, but not for education expenses.