Support and shape the future of talent management live online, or in-person. Requests by 401 (k) plan participants to take hardship distributions from their accounts can turn into an administrative hardship for HR plan administrators, but there are ways to make handling these requests work—both for employees and benefit managers.

What do you need to know about hardship distributions?

• Documentation to support that the hardship distribution was properly made in accordance with the applicable plan provisions and the tax code. “IRS rules require that all other distributions and nontaxable loans from all plans of the same employer be taken first,” Kaplan said.

Do you have to pay taxes on hardship withdrawals?

• Hardship withdrawals are subject to certain IRS restrictions. The withdrawal amount is subject to income tax and, if participants are not at least 59½ years old, a 10 percent withdrawal penalty. Participants do not have to pay the withdrawal amount back, which means their ultimate retirement savings will be much more seriously impacted.

Are there restrictions on withdrawals from a 401k?

In-service withdrawals from 401 (k) plan accounts are restricted by statute, regulations and plan design.

Do you have to pay taxes on 401K hardship distribution?

You may also have to pay an additional 10% tax, unless you’re age 59½ or older or qualify for another exception. You may not be able to contribute to your account for six months after you receive the hardship distribution. Remember, a 401 (k) plan is designed to help you save money for retirement.

Can a hardship withdrawal be made for a dependent?

The Internal Revenue Service (IRS)’s “immediate and heavy financial need” stipulation for a hardship withdrawal applies not only to the employee’s situation. Such a withdrawal can also be made to accommodate the need of a spouse, dependent, or beneficiary. Immediate and heavy expenses include the following:

What are the consequences of taking a hardship distribution?

However, you should know these consequences before taking a hardship distribution: The amount of the hardship distribution will permanently reduce the amount you’ll have in the plan at retirement. You must pay income tax on any previously untaxed money you receive as a hardship distribution.