In your article “I want to access my 401(k) sooner. Is a loan the only way? you wrote that hardship distributions were “…available only if the participant has an “immediate and significant financial need” and that the distribution cannot exceed the amount “necessary to satisfy the financial need.”
Cher Kent,
There is some definition of these terms, but keep in mind that plans are not required to allow hardship withdrawals. The plan documents, available from the plan administrator, will detail what a given plan allows. For “immediate and significant financial needs,” plans may use a customized definition or the safe harbor definition. Most opt for the safe harbor option. Several events are automatically qualified such as:
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Medical care costs for the employee, his or her spouse or dependents.
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Expenses resulting from a federally declared disaster.
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Funeral expenses for the employee, their spouse, children or dependents.
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Certain expenses to repair damage to the employee’s main residence.
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Tuition, related tuition, and room and board costs for the next 12 months of postsecondary education of the employee or his or her spouse or dependents.
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Funds needed to prevent eviction of the employee from his or her primary residence or foreclosure of the mortgage.
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Expenses directly related to the purchase of an employee’s primary residence (excluding mortgage payments).
This does not mean that if any of these events occur you can draw down your account for any amount, as hardship distributions must be limited to the amount “necessary to satisfy need.”
To meet this standard, the employee could not reasonably obtain the funds from any other source and the amount is limited to what is necessary to cover the “immediate and burdensome financial need”, including any taxes or penalties that may result of distribution.
Therefore, the employee may not be entitled to insurance or other reimbursement and must not have the ability to liquidate other assets, cover costs by terminating elective deferrals to the plan, or obtain a loan.
SECURE 2.0 has simplified the documentation of difficulty distributions. Employers may rely on the employee’s written certification that the need exists, and they have no other means of covering the applicable need, but there are rules surrounding the “justification” of a hardship allocation and preservation of documents.
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It’s worth noting that SECURE 2.0 also allows for a new $1,000 emergency withdrawal exception that is penalty-free and, unlike normal hardship distributions, can be repaid within three years. It avoids the restrictions mentioned above and can be used for “unpredictable or immediate financial needs related to necessary personal or family emergency expenses.”
However, this new exemption is so new that most plans do not yet have the capacity to implement and administer it.
Normally, hardship distributions are taxable and may be subject to an additional 10% early distribution penalty if taken before age 59½. Additionally, you cannot repay the distribution and it cannot be transferred to another plan. The loss of income that a distribution could have generated if it had remained in the plan could be substantial over time. As a result, hardship distributions are generally a last resort.
If you have a question for Dan, please send him an email with “CNET Q&A” in the subject line.
Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne and Tampa, Florida. His comments are for informational purposes only and do not replace personalized advice. Consult your advisor to find out what is best for you. Some reader questions are edited to facilitate presentation of the topic.
2024-01-06 01:10:20
#rules #401k #hardship #distribution #CNET
