Distributions may be made from a 401(k) or 403(b) retirement plan in situations involving the employee’s hardship.
Unlike early distributions from an IRA for higher education expenses, a hardship distribution from a 401(k) or 403(b) retirement plan may still be subject to the 10 percent early distribution tax penalty if the employee has not yet reached age 59-1/2. This is in addition to ordinary income taxes on the distribution amount (with the exception of designated Roth contributions).
Hardship distributions from a 401(k) or 403(b) retirement plan may be made only because of an immediate and heavy financial need. The regulations for 401(k) retirement plans note that “a financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.”
There must be no other resources or alternative means reasonably available to the employee sufficient to satisfy the financial need. This includes liquidation of the employee’s assets, suspension of employee contributions to the retirement plan, loans from the retirement plan and commercially available loans. Employees are not required to take actions that would be counterproductive in effect (e.g., tapping into resources that would result in an increase in demonstrated financial need or disqualify the employee from other student financial aid programs).
However, distributions to pay tuition, fees, room and board expenses for up to the next 12 months of postsecondary education for the employee, the employee’s spouse, children and dependents are deemed to be made because of an immediate and heavy financial need.
The amount of the distribution is limited to the amount necessary to satisfy the hardship. Distributions may be increased to cover the cost of federal, state and local income taxes and tax penalties associated with the distribution, but may not otherwise exceed the amount of financial need.
The distribution is also limited to a return of the employee’s elective contributions, reduced by any previous distributions of employee contributions. The distribution may not include any of the retirement plan’s income or nonelective contribution. Certain matching employer contributions may be distributed if the plan permits.
Employees who take a hardship distribution may not make contributions to the retirement plan for 6 months after receipt of the hardship distribution. Hardship distributions may not be rolled over into an IRA.
Plans are allowed to provide for hardship distributions, but are not required to make them available.
Hardship distributions from a 457(b) retirement plan, however, require the distribution to be made only because of an “unforseeable emergency.” The regulations at 26 CFR 1.457-6(c)(2)(i) state that “the purchase of a home and the payment of college tuition are not unforeseeable emergencies under this paragraph (c)(2)(i).”
Hardship distributions from qualified retirement plans are not subject to coordination restrictions.
There is no phaseout on eligibility for hardship distributions.
The legislation authorizing hardship distributions does not expire.
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