Hardship Withdrawal

Definition

Withdrawal that occurs on account of the participant experiencing  a financial hardship.

Hardship must be defined in the plan document , but typically fall within "circumstances of sufficient severity that a participant is confronted by present or impending financial ruin or his family is clearly endangered by present or impending want or privation.".

Hardship distribution can occur from a profit sharing, 401(k) or stock bonus plan. Hardship distributions cannot occur from a pension plan.    

The hardship distribution rules must be applied to participants on a consistent basis

Under a 401(k) plan, an in-service withdrawal of elective contributions may not be distributed before a triggering event occurs.

A hardship distribution of elective deferrals are limited to “immediate and heavy financial need”, which includes medical care, to prevent eviction from principal residence and to pay tuition expenses for higher education

Referring Cite

IRC § 401(a), Revenue Ruling 71-224, IRC §401(k)(2)(B)(i)(IV); Treas. Reg. §1.401(k)-1(d)(1) , Treas. Reg. §1.401(k)-1(d)(3)

Additional Helpful Information

• Hardship must be shown by positive evidence submitted to the plan trustee.
• The plan should include examples of circumstances wherein hardship may be found but do not limit such finding to those listed.
• Hardship distributions are not rollover eligible, and therefore not subject to the 20% mandatory withholding that applies to eligible rollover distributions that are not processed as a direct rollover. IRC §402(c)(4)(C)
• Under a 401(k) plan, an in-service withdrawal of elective contributions may not be distributed before a triggering event occurs.

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