Hardship Withdrawals

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As Plan Administrator, you will need to determine if a hardship withdrawal is allowed under your firm’s plan. You can do this by checking your plan adoption agreement.

Determining if a hardship withdrawal is allowed

As Plan Administrator, you can determine what types of hardship withdrawals — if any — are allowed from your plan by checking the adoption agreement. In general, hardship withdrawals may be allowed from profit sharing plans and profit sharing plans with 401(k) features.

There are three types of hardship withdrawals: 401(k), Roth 401(k) Salary Deferral, and non-401(k). Check your adoption agreement to see if any or all hardship withdrawal types are allowed by your plan.

• The 401(k) hardship withdrawals apply only to pre-tax 401(k) source contributions (source A) (including Roth 401(k) contributions, source N). The 401(k) hardship withdrawals will include, on a pro rata basis, your Pre-Tax Elective Contributions and the following employer contributions, to the extent applicable under your plan: Safe Harbor Matching Employer Contributions; Safe Harbor Nonelective Contributions; Qualified Matching Contributions; and Qualified Nonelective Contributions. For SIMPLE 401(k) plans, a 401(k) Withdrawal will include, on a pro rata basis, your Pre-Tax Elective Contributions and the following employer contributions, to the extent applicable under your plan: SIMPLE Matching Contributions and SIMPLE Nonelective Contributions.
• Only Roth 401(k) contributions will be included in the Roth 401(k) withdrawal.
• The non-401(k) hardship withdrawals apply only to employer profit sharing (source F) and employer matching contributions (source D) and only if the participant is 100% vested in these contributions. See the Contributions section for more details on contribution types.

All types of hardship withdrawals may be requested by an active participant if he or she has a financial hardship and must satisfy an immediate and heavy financial need.

What qualifies as a financial hardship?

The following reasons qualify as a financial hardship as set forth in the plan document:

• Purchase of your primary residence (excluding mortgage payments)
• To prevent eviction from or foreclosure of mortgage on your primary residence
• Payment of tuition and related expenses for the next 12 months of post-secondary education for you, or your spouse, children, dependents or primary beneficiary**
• Payment of medical expenses (of the type that are deductible on an income tax return) for you, or your spouse, children, dependents or primary beneficiary**
• Payment of burial or funeral expenses for your deceased parent, spouse, children, dependents or primary beneficiary**
• Payment of expenses to repair damage to your principal residence that would qualify as a casualty deduction under Section 165 of the Internal Revenue Code (without regard to whether the loss exceeds 10% of adjusted gross income)
• Payment of expenses and losses (including loss of income) incurred on account of a disaster declared by the Federal Emergency Management Agency or its successor, but only if your principal residence or principal place of employment at the time of the disaster was located in the designated disaster area.
• Payment of expenses resulting from experiencing domestic abuse.

*The "primary beneficiary" under the plan is the individual who has an unconditional right to all or a portion of the participant’s account balance upon his or her death.

Because hardship withdrawals can only be approved by the Plan Administrator, you will need to keep on file the applicable documentation (e.g., purchase and sales agreement, foreclosure notice) in the event your plan is audited.

Active participants can withdraw only the amount needed to meet the financial hardship (including the estimated taxes payable on the hardship withdrawal). The withdrawal will be made pro-rata from all of the available investment options. Also, the amount is subject to any applicable taxes, IRS early withdrawal penalties and withdrawal restrictions (for example, no withdrawals are allowed from the PCRA without first liquidating assets and transferring the necessary amount to the Program’s investment options).

Eligibility for a hardship withdrawal

To request a hardship withdrawal, the participant must:

• Be 100% vested in the employer source contributions if a non-401(k) hardship withdrawal is requested
• Have taken all other available withdrawals (such as from the after-tax employee contribution account and rollover account) from any and all plans in which the participant has an account, including this one, if a 401(k) hardship withdrawal is requested
• If a non-401(k) hardship withdrawal is requested, have taken all available after-tax withdrawals if there are after-tax contributions in the account.

Based on the criteria listed above, if the participant is eligible for a withdrawal, give him or her a Hardship Withdrawal Form along with a “Special Tax Notice Regarding Plan Payments” and a “Notice of Benefits and Benefit Payment Form” (attached to the Hardship Withdrawal Form). 

Requesting a hardship withdrawal

In order to request a hardship withdrawal, the participant must complete the Hardship Withdrawal Form. The participant then gives the signed Hardship Withdrawal Form to you.

How to complete the Hardship Withdrawal Form (page 1)

1. The Plan Administrator must complete the employer information that relates to the plan.
2. The participant completes the participant information.
3. The participant completes the hardship withdrawal information, including:
   • Dollar amount or percentage of withdrawal, AND
   • The participant provides supporting documentation to you.

How to complete the Hardship Withdrawal Form (page 2)

1. The participant must choose their elected withdrawal amounts.

2. The participant must choose whether to withhold federal taxes.

   
    

How to complete the Hardship Withdrawal Form (page 3)

1. The participant must choose whether to withhold state income taxes.

2. The participant must sign and date the Form. Then the participant sends it to the Authorized Plan Representative for signature.
    

   
    

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Sending the Hardship Withdrawal Form to the Program

Once you receive the participant’s completed form, you must review and sign it as the Authorized Plan Representative. Submit the completed Hardship Withdrawal Form to the Program via mail or email. 

Once the Program receives the properly completed and signed Hardship Withdrawal Form, the hardship withdrawal is processed and a check (with a confirmation statement attached) is issued within two business days. Hardship withdrawal checks are sent via US Mail to the participant at the address of record. The participant also has the option to submit the form with an ACH request to have the funds direct deposited within two business days. In January of the next calendar year, the Program will mail the participant an IRS Form 1099-R regarding any taxable withdrawals for the prior tax year.

Any withdrawals processed by the close of business on the last business day of the quarter will be reflected on the participant’s quarterly statement. Quarterly statements are mailed no later than 10 business days after the end of each quarter.

Hardship Withdrawal Tax Implications

Under IRS rules, hardship withdrawals are subject to taxes and penalties, as described below:

These are general tax guidelines. You should always direct participants to seek tax advice from their legal or tax advisor.

Timing of Withdrawal

The Program will send the participant a check to the address of record, US Mail, within two business days after the request is processed.

Hardship Withdrawals from Roth 401(K) Contributions

Special tax consequences apply to hardship withdrawals from Roth 401(k) contributions. The taxation of a hardship withdrawal from Roth 401(k) contributions depends on whether or not the withdrawal is a qualified distribution. “Qualified” distributions from Roth accounts are fully excludable from gross income. To be qualified, the distribution must be made after:

• The participant has reached age 59½, become disabled, or died, and
• The Roth account has been maintained for at least five years.

In all other cases, the distribution is nonqualified. Nonqualified distributions are treated partly as a tax-free return of contributions and partly as taxable investment earnings.

If withdrawals are distributed before age 59½, the taxable portion of the payment is subject to an early distribution 10% tax penalty. This extra tax does not apply to the payment if the participant is:

• At least age 55 when separated from service,
• Terminated due to disability,
• Paid in equal (or almost equal) payments over the life expectancy of the participant or joint life expectancy of the participant and beneficiary,
• Using the payment to cover certain medical expenses that can be deducted on a tax return, or
• Deceased.

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