These frequently asked questions and answers provide general information and should not be cited as any type of legal authority. They provide the user with information responsive to general inquiries. Because these answers do not apply to every situation, yours may require additional research.
- Under what circumstances can a participant get a hardship distribution from a retirement plan?
- What is the IRS definition of hardship for a 401(k) plan?
- How does a participant show that he or she is experiencing a hardship?
- What is the maximum amount of elective contributions that can be distributed as a hardship distribution from a 401(k) plan?
- What are the consequences of taking a hardship distribution of elective contributions from a 401(k) plan?
- What is a distribution on account of an unforeseeable emergency under a 457(b) plan?
- Are hardship distributions allowed from an IRA?
- Are there special hardship distributions available for hurricanes and natural disasters?
A retirement plan may, but is not required to, provide for hardship distributions. Many plans that provide for elective deferrals provide for hardship distributions. Thus, 401(k) plans, 403(b) plans, and 457(b) plans may permit hardship distributions.
If a 401(k) plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship. Thus, for example, a plan may provide that a distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and education expenses. In determining the existence of a need and of the amount necessary to meet the need, the plan must specify and apply nondiscriminatory and objective standards.
(Reg. Section 1.401(k)-1(d)(3)(i))
If your 401(k) plan made hardship distributions that didn’t follow the plan language, or if your plan doesn’t have hardship language, find out how you can correct this mistake.
The rules for hardship distributions from 403(b) plans are similar to those for hardship distributions from 401(k) plans.
If a 457(b) plan provides for hardship distributions, it must contain specific language defining what constitutes a distribution on account of an "unforeseeable emergency."
(Reg. Section 1.457-6(c)(2))
The Bipartisan Budget Act of 2018 mandated changes to the 401(k) hardship distribution rules. On November 14, 2018, the Internal Revenue Service released proposed regulations to implement these changes. Generally, these changes relax certain restrictions on taking a hardship distribution. Although the provisions are effective January 1, 2019, for calendar year plans, the proposed regulations do not require changes for 2018-2019. Effective January 1, 2020, following issuance of final regulations, certain changes will be required.
For a distribution from a 401(k) plan to be on account of hardship, it must be made on account of 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. (Reg. Section 1.401(k)-1(d)(3)(i))
Under the provisions of the Pension Protection Act of 2006, the need of the employee also may include the need of the employee's non-spouse, non-dependent beneficiary.
Whether a need is immediate and heavy depends on the facts and circumstances. Certain expenses are deemed to be immediate and heavy, including: (1) certain medical expenses; (2) costs relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) burial or funeral expenses; and (6) certain expenses for the repair of damage to the employee's principal residence that would qualify for the casualty deduction under IRC Section 165. Expenses for the purchase of a boat or television would generally not qualify for a hardship distribution. A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.
(Reg. Section 1.401(k)-1(d)(3)(iii))
The proposed regulations modify the safe harbor list of expenses for which distributions are deemed to be made on account of an immediate and heavy financial need by: (1) Adding “primary beneficiary under the plan” as an individual for whom qualifying medical, educational, and funeral expenses may be incurred; (2) modifying the expense relating to damage to a principal residence that would qualify for a casualty deduction under Section 165 to provide that for this purpose the new limitations in Section 165(h)(5) do not apply; and (3) adding a new type of expense to the list, relating to expenses incurred as a result of certain disasters.
A distribution is not considered necessary to satisfy an immediate and heavy financial need of an employee if the employee has other resources available to meet the need, including assets of the employee's spouse and minor children. Whether other resources are available is determined based on facts and circumstances. Thus, for example, a vacation home owned by the employee and the employee's spouse generally is considered a resource of the employee, while property held for the employee's child under an irrevocable trust or under the Uniform Gifts to Minors Act is not considered a resource of the employee. (Reg. Section 1.401(k)-1(d)(3)(iv)(B))
A distribution is deemed necessary to satisfy an immediate and heavy financial need of an employee if the employee has obtained all other currently available distributions the plan and all other plans maintained by the employer. Under the proposed regulations, effective January 1, 2019, a plan administrator has the option of including or excluding the requirement that the employee first obtain a plan loan prior to requesting a hardship distribution.
(Reg. Section 1.401(k)-1(d)(3)(iv)(E))
A hardship distribution may not exceed the amount of the employee's need. However, the amount required to satisfy the financial need may include amounts necessary to pay any taxes or penalties that may result from the distribution.
(Reg. Section 1.401(k)-1(d)(3)(iv)(A))
Generally, if a 401(k) plan provides for hardship distributions, the plan will specify what information must be provided to the employer to demonstrate a hardship. Most 401(k) plans use the "deemed necessary" rules described in Q&A-2 above, so that inquiry into the employee's financial status is not required. In other cases, an employer may generally rely on the employee's representation that he or she is experiencing an immediate and heavy financial need that cannot be relieved from other resources. However, an employer cannot rely on an employee's representation if the employer has actual knowledge that the employee's need can be relieved: (1) through reimbursement or compensation by insurance; (2) by liquidation of the employee's assets; (3) by stopping elective contributions or employee contributions under the plan; (4) by other currently available distributions (such as plan loans) under plans maintained by the employer or by any other employer; or (5) by borrowing from commercial sources. (Reg. Section 1.401(k)-1(d)(3)(iv)(C))
However, an employee is not required to take counterproductive actions. For example, the need for funds to purchase a principal residence cannot reasonably be relieved by a plan loan if the loan would disqualify the employee from obtaining other necessary financing. (Reg. Section 1.401(k)-1(d)(3)(iv)(D))
Hardship distributions from a 401(k) plan were previously limited to the amount of the employee’s elective deferrals and generally did not include any income earned on the deferred amounts. The proposed regulations permit, but do not require, 401(k) plans to allow hardship distributions of elective contributions, QNECS, QMACS, and safe harbor contributions and earnings on these amounts regardless when contributed or earned. The change can be made as of January 1, 2019.
(IRC Section 401(k)(14)(A) and Reg. Section 1.401(k)-1(d)(3)(ii))
If your 401(k) plan made hardship distributions more than your plan allowed, find out how you can correct this mistake.
Under the proposed regulations effective January 1, 2019, it is optional to prohibit an employee from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution. Under the proposed regulations effective January 1, 2020, the 6-month suspension from making elective contributions is no longer allowed.
(Reg. Section 1.401(k)-1(d)(3)(iv)(E)(2))
Hardship distributions are includible in gross income unless they consist of designated Roth contributions. In addition, they may be subject to an additional tax on early distributions of elective contributions. Unlike loans, hardship distributions are not repaid to the plan. Thus, a hardship distribution permanently reduces the employee's account balance under the plan.
A hardship distribution cannot be rolled over into an IRA or another qualified plan.
(Code Section 402(c)(4))
Under a 457(b) plan, a hardship distribution can only occur when the participant is faced with an unforeseeable emergency. (Code Section 457(d)(1)(iii))
An unforeseeable emergency is a severe financial hardship resulting from an illness or accident, loss of property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant or beneficiary. Examples of events that may be considered unforeseeable emergencies include imminent foreclosure on, or eviction from, the employee's home, medical expenses, and funeral expenses. Generally, the purchase of a home and the payment of college tuition are not unforeseeable emergencies.
(Reg. Section 1.457-6(c)(2)(i))
Whether a participant or beneficiary is faced with an unforeseeable emergency depends on the facts and circumstances. However, a distribution is not on account of an unforeseeable emergency to the extent that the emergency can be relieved through reimbursement or compensation from insurance, liquidation of the participant's assets, or cessation of deferrals under the plan. (Reg. Section 1.457-6(c)(2)(ii))
A distribution on account of an unforeseeable emergency must not exceed the amount reasonably necessary to satisfy the emergency need. (Reg. Section 1.457-6(c)(2)(iii))
Not exactly. There is generally no limit on when an IRA owner may take a distribution from his or her IRA, although there may be unfavorable tax consequences, such as an additional tax on early distributions. However, certain distributions from an IRA that are used for expenses similar to those that may be eligible for hardship distributions from a retirement plan are exempt from the additional tax on early distributions. Specifically, a distribution from an IRA for higher education expenses or to finance a first-time home purchase is exempt from the early distribution tax.
(Code Section 72(t)(2)(E),(F))
Prior to the issuance of the proposed regulations there were no special rules for hardship distributions on account of hurricanes or other natural disasters. The proposed regulations modify the safe harbor list of expenses for which distributions are deemed to be made on account of an immediate and heavy financial need by adding a new type of expense to the list, relating to expenses incurred as a result of certain disasters. This new safe harbor expense is similar to relief given by the IRS after certain major federally declared disasters, such as the relief relating to Hurricane Maria and California wildfires provided in Announcement 2017-15, 2017-47 I.R.B. 534, and is intended to eliminate any delay or uncertainty concerning access to plan funds following a disaster that occurs in an area designated by the Federal Emergency Management Agency for individual assistance.
See Tax Relief in Disaster Situations and Publication 547, Casualties, Disasters, and Thefts, for disaster area relief.