Hardship Distributions | Participant Certification

Updated by Richard Phillips, EA, AIFA, CPC, CPFA, QPA, QKA

The 401(k) regulations prescribe rules for determining when a financial hardship withdrawal is available from an employee's elective deferrals.

Definition of a hardship. The plan must define a hardship in objective terms. The distribution must be made on account of an immediate and heavy financial hardship and must not exceed the amount needed to satisfy the financial need.

The regulations provide the administrator with some latitude when determining what constitutes a hardship. However, in an effort to comply with the uniformity requirements to treat all requests the same as described in Treas. Reg. §1.411(d)-4, the plan must be objective in establishing the hardship criteria.

Alternatively, the safe harbor definition specifies:

  1. Medical care
  2. Purchase of a principal residence (not including mortgage payments)
  3. Certain post-secondary education expenses expected to be incurred in the next 12 months (student loan payments do not qualify)
  4. Prevent eviction or foreclosure from primary residence
  5. Funeral expenses incurred by the participant for their spouse, children, parents or dependents
  6. Repair expenses to a participant's principle residence that would classify as a deduction under IRC §165
  7. Expensees and losses incurred by the participant as a result of a FEMA declared disaster

Substantiation of hardship/documentation request from plan administrator. Although the regulations do not prescribe specific documentation requirements to support a hardship withdrawal, it is advisable for the plan administrator to require substantiation from the employee of the financial need. For example, the plan administrator could request receipts (e.g., medical expenses, education expenses), invoices (e.g., tuition bill), contracts (e.g., purchase of a residence) or other relevant documentation (e.g., communication from a bank indicating a pending foreclosure if certain action is not taken).

Section 312 of the SECURE Act 2.0 permits plans to rely on written employee certifications that the financial need is a type permitted under the regulaltions. However, while relying on §312 the plan administrator retains the responsiblity of maintaing documents supporting all decisions. Therefore, requesting the participant provide supporting hardship documents would be considered reasonable when uniformly required for all hardship requests.

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