Accessing Funds: Hardship Withdrawal Requests
Step 1 – Determine if Hardship Withdrawals Are 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.
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).
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.
If Eligible for a Withdrawal
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.
Step 2 — Participant Decisions
Participants can request a hardship withdrawal by completing Hardship Withdrawal Form.
Step 3 — Complete Hardship WIthdrawal Form
The participant must complete 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.
Instructions for Completing Hardship Withdrawal Form (page 1)
A. You complete the employer information that relates to the plan.
B. The participant completes the participant information.
C. 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.
• The participant provides supporting documentation to you.
Instructions for Completing Hardship Withdrawal Form (page 2)
A.The participant must sign and date the Form. Then the participant sends it to the Authorized Plan Representative for signature.
Step 4 – Send 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 using one of the methods described under “Mail & Email” in the Forms, Tools and Resources section of the Guide or to the address on the form.
Steps 5 Through 7 – the Program’s Role
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 overnight delivery to the participant at the firm. 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.