See this page of the online guide for the six pre-approved reasons for taking a hardship withdrawal. The firm will need to determine which documentation to require to approve the hardship withdrawal, and maintain it on file in the event the plan is audited.
Please see section 14 of your adoption agreement to determine the in-service withdrawal provisions that your firm chose for the plan.
For an in-service withdrawal, participants should use the In-Service Withdrawal Form. If the participant has terminated employment or meets one of the other reasons for the request in section 3 of the form, use the Distribution Request Form. On either form, rollover instructions can be entered in section 8.
When someone’s employment status changes, notify the Program by submitting a Participant Data Change Form. The Program will send the participant a postcard the following year notifying them of their distribution options by directing them to this webpage. Participants whose vested account balance is $5,000 or less cannot continue to maintain their account in your plan; the Program will notify them that their account will be included in the annual “cash out of small account” sweep if they take no action within 90 days of the notice.
The Program can confirm for you if we have a beneficiary designation on file. Once beneficiaries are determined, each claimant should submit a Death Benefits Claim Form (for multiple beneficiaries, all forms should be submitted together). The Program will also need one certified copy of the death certificate.
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.
Steps to request a hardship withdrawal
1. Determine if a hardship withdrawal is allowed from your plan by checking the plan’s adoption agreement; send Hardship Withdrawal Form along with the notice of taxable distribution to participant
2. Decide to request a hardship withdrawal and the type of withdrawal (i.e., 401(k), non-401(k))
3. Complete, sign and send Hardship Withdrawal Form to the Plan Administrator
4. Review, sign and send Hardship Withdrawal Form to the Program
5. Process Hardship Withdrawal Form
6. Send check to participant
7. Send IRS Form 1099-R to participant and IRS
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 two types of hardship withdrawals: 401(k) and non-401(k). Check your adoption agreement to see if either or both 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 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.
Both 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:
- Buying the participant’s primary home
- Post-secondary educational fees for the next 12 months, including tuition, room and board, and other related charges for the participant or the participant’s spouse, children or dependents, or the participant’s primary beneficiary* under the plan
- Unreimbursed medical expenses, for the participant or the participant’s spouse, children or dependents, or the participant’s primary beneficiary* under the plan
- Preventing eviction from or foreclosure on the participant’s primary home
- Burial expenses for the participant’s deceased parent, spouse, children or dependents, or the participant’s primary beneficiary* under the plan
- Expenses to repair damages to the participant’s primary home that would qualify as a casualty deduction under Section 165 of the Internal Revenue Code (effective 1/1/18, “casualty deduction” only applies to damages that occurred as a result of a federally declared disaster).
*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). Participants must specify the investment options and the amount or percentage to be taken from each option, unless the withdrawal is for the entire account. If no instructions are given, 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 SDBA 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). If the participant is requesting no withholding, Form W-4P should also be submitted to the Program. Form W-4P can be obtained through the IRS website at www.irs.gov.
Requesting a hardship withdrawal
In order to request a hardship withdrawal, the participant must complete the Hardship Withdrawal Form. The participant may also complete Form W-4P to request no withholding. (If Form W-4P is not submitted, the Program will withhold federal income taxes from the withdrawal at a flat 10% rate.) The participant then gives the signed Hardship Withdrawal Form (along with Form W-4P, if applicable) to you.
How to complete the Hardship Withdrawal Form (page 1)
- The Plan Administrator must complete the employer information that relates to the plan.
- The participant completes the participant information.
- The participant completes the hardship withdrawal information, including:
- Type of hardship withdrawal.
- Reason for financial hardship.
- Investment funds the withdrawal will be coming from.
- Dollar amount or percentage of withdrawal. AND
- The participant provides supporting documentation to you.
How to complete the Hardship Withdrawal Form (page 2)
- The participant must sign and date the Form. Then the participant sends it to the Authorized Plan Representative for signature.
Sending the Hardship Withdrawal Form to the Program
Once you receive the participant’s completed form, and Form W-4P (if applicable), 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. 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:
|Type of Hardship Withdrawal
|Subject to Ordinary Income Tax
|Subject to Penalty Tax for Early Payment
|Eligible for Rollover
|Pre-tax 401(k) Contributions only; earnings may not be withdrawn
|Roth 401(k) Contributions only; earnings may not be withdrawn
|Yes, except for a “qualified” distribution
|Only if taxable
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