401(k) Plan Administration: Hardship Distributions
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401(k) Plan Administration: Hardship Distributions 
construction; government contractor and technology; not-for-profit; real estate; emerging growth companies  tax; business advisory 

 

By: Jim Wagenmann
Abstract:

In the current economic climate, many 401(k) plan participants are looking at the funds in their retirement accounts and examining ways to distribute those funds to alleviate current financial difficulties. Generally, 401(k) plans are not allowed to make distributions to participants except in limited circumstances. As allowed under the applicable regulations, some 401(k) plan documents allow participants to tap into their retirement funds before retirement through “hardship distributions,” if their financial difficulties meet certain qualifications. If a 401(k) plan document does not currently allow for hardship distributions, the employer may amend the document to allow for such distributions.

 

A distribution that qualifies as a hardship distribution is subject to income tax on the amount distributed and may also be subject to the 10 percent penalty normally applicable to early withdrawals from such plans. A plan participant may receive a hardship distribution for an “immediate and heavy” financial need that can be met only with funds from the 401(k) plan. Determining whether a need is immediate and heavy and the amount required to satisfy that need is dependent on the terms of the plan document.

A plan participant may receive a hardship distribution for an 'immediate and heavy' financial need that can be met only with funds from the 401(k) plan.

 

 

A hardship distribution must be limited to a maximum amount equal to the employee’s elective contributions as of the date of the distribution, less any previous distributions of elective contributions. The maximum for a hardship distribution does not include any earnings on contributions to the 401(k) plan, qualified non-elective contributions or qualified employer matching contributions. The amount of a hardship distribution is also limited to the amount needed to satisfy the participant’s immediate and heavy need, plus the amount needed to satisfy any anticipated federal, state or local income taxes arising from the distribution.