Having a hardship can be difficult. Whether it a hardship due to a disaster (flood, earthquake, fire, hurricane, etc…) or a financial hardship, the tax code allows for hardship distributions in addition to casualty losses.
Companies may offer hardship distributions from the companies 401(k) and 403(b) retirement. What do you need to know about hardship distributions?
IRAs (both Traditional IRAs and Roth IRAs) can not offer hardship distributions.
Before requesting a hardship distribution you need to know several things.
1. Does your retirement plan offer a hardship distribution?
2. What are the procedures to request a hardship distribution?
3. What is the plans definition of a hardship?
4. Are there any amount limits and types of funds that can be distributed for a hardship from the employee’s retirement account?
5. Is there a immediate financial need by the employee for a hardship distribution?
6. The amount requested for the hardship as to meet the immediate financial need?
The plan administrator must….
1. Obtain a statement or verification of the employee’s hardship as required by the terms 401(k) and 403(b) plan.
2. Determine the exact nature of the employee’s hardship and does it qualify as defined by the plan’s definition of a hardship?
3. Does the plan’s terms state the hardship distribution is not necessary if the employee has other resources (spouse and minor children’s assets). If the employee does not have other resources, document the lack of resources.
4. Document whether the employee has exhausted loans or other types of distributions that may be available other than hardship distribution though the plan or any other plan in which the employee participates.
5. Verify that the hardship distribution will meet and does not exceed the financial needs of the employee. Tax and penalties may be included in the hardship distribution.
6. Determine that the hardship distribution does not exceed the limits under the plan and consists of only the amounts eligible as defined by the plan. The plan could limit the amount of the distribution to a specific amount and require that the hardship distribution be made from salary reductions contributions.
7. Whether the plan suspends the employee from contributing to the plan and all other employer plans for at least six months after the employee receives a hardship distribution after informing the employee and enforcing the contribution suspension.
8. If a plan does not properly make a hardship distribution, the plan may be able to correct the mistake.
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