What is a hardship withdrawal?
A hardship withdrawal is a withdrawal of funds from one’s retirement account due to an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need. The need of the employee includes the need of the employee's spouse or dependent.
It is not required that a 401(k) plan includes a hardship withdrawal option. If you are unsure if your plan allows this feature, please consult your plan documents or your employer.
In October 2019, the IRS responded to the Tax Cuts and Jobs Act of 2017 and the Bipartisan Budget Act of 2018 through its release of the final amendments to the hardship distribution regulations. Thanks to these newly-amended regulations, plan sponsors will now have new customization options for their plan’s hardship distribution rules. There are also provisions of these amended regulations that will require some administrative changes that plan sponsors will need to start implementing as early as January 1, 2020.
When can I request a hardship withdrawal?
You may request a hardship withdrawal for the following expenses:
- Certain medical expenses
- Cost related to the purchase of a principal residence
- Payments necessary to prevent the eviction or foreclosure on a primary residence
- Certain expenses for the repair of damage to one’s primary residence
- Tuition and educational fees and expenses
- Burial or funeral expenses
- Expenses related to a federally-declared disaster
Be aware that the amount of a hardship withdrawal cannot exceed the amount of the financial need. This means if you require $1,000 and have an available hardship amount of $5,000, you may only request up to $1,000.
How do I request a hardship withdrawal?
You may request a hardship withdrawal by logging into your participant account and navigating to the Withdrawals tab.
Once you complete the form, you'll be asked to sign the form electronically. Your form will then be sent your plan sponsor for signature.
After we receive the signed distribution form, we'll begin processing your distribution.
Do I need to provide documentation for my hardship withdrawal?
Plan sponsors can now rely on a written certification statement from you instead of having to review supporting documents to make a hardship determination. However, sponsors are still prohibited from authorizing a hardship withdrawal if they have knowledge that your need would not qualify for a hardship.
Can I take a hardship withdrawal if I have an outstanding loan?
Yes. The newly-issued rules now eliminate the requirement for a participant to exhaust their other forms of distributions and loans available under the plan before taking a hardship. Since this change is optional, plan sponsors can customize their plan to suit their preference.
Are there taxes on my hardship withdrawal?
Since this withdrawal will not be repaid to the plan, there is a 10% federal withholding which can be waived or increased as you see fit. If you are under the age of 59½, a 10% early withdrawal penalty is also added to the regular taxable amount of the distribution.
If your hardship withdrawal amount includes after-tax sources, the after-tax amount withdrawn will not be subject to taxes.
You will receive a Form 1099-R at the time of the withdrawal. This form will be needed when filing your yearly tax reporting.
Can I roll my hardship withdrawal into an IRA or new retirement plan?
No, hardship withdrawals are not eligible for rollovers.
When can I expect to receive my hardship withdrawal?
Once the hardship request form and supporting documents are provided and reviewed, you will be provided a distribution form to sign – finalizing your request. Your plan administrator will then review the distribution form and supporting documents to determine if your request is eligible for hardship relief.
Once approved, a check will be issued from Charles Schwab Bank. By default, this check is mailed via USPS and can take up to 10 days to arrive.
Want more information on the new Safe Harbor Hardship rules? Check out this article.