Financial Hardship Answers

What constitutes a financial hardship?

Not all plans allow hardship distributions. If yours does, the IRS says that you must have an " immediate and heavy financial need" and the amount withdrawn may not exceed your need. Your plan can use one of two tests to determine whether you have an "immediate and heavy financial need": (1) "safe harbor" test or (2) "facts and circumstances" test.

Most plans use the "safe harbor" test. Under the safe harbor rules, you can qualify for a "hardship withdrawal" if you need the money for:

• Unreimbursed medical expenses for yourself or dependents
• Downpayment of a primary residence
• College tuition for yourself or a dependent (that's due in the next 12 months)
• Saving your home from eviction or foreclosure
• Payment for burial or funeral expenses for my spouse, for my child
  

The price: you'll have to pay the 10% early withdrawal penalty, with some exceptions. You will also have to sit out of your 401(k) plan for 6 months. Be sure you calculate just how much you will lose before you take an early withdrawal - it will be a lot.

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Do I have to pay taxes on a hardship withdrawal?

Yes. Unless you're 59 ½ you'll have to pay a 10% early withdrawal penalty.

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How do I get a hardship distribution?

You will need to complete some forms. If you're plan uses the "Safe Harbor" test, you'll need to furnish copies of notices for qualification for a hardship. If we handle your plan, please call us for the necessary paperwork.

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