Many plans permit hardship withdrawals of salary deferrals. Only the amount the participant deferred may be distributed. Earnings on the deferrals may not be distributed unless they were credited to the participant's account generally before 1989.
The IRS rules regarding hardship withdrawals are very specific and regulations require the satisfaction of two conditions:
- There is an immediate and heavy financial need; and
- Other resources are not available to satisfy the need.
A safe harbor method of satisfying these requirements is utilized by many 401(k) plans which permits a hardship distribution if it is due to:
- Certain unreimbursed medical expenses for the participant or the participant's spouse, children, dependents or beneficiaries;
- Costs related to the purchase of a participant's principal residence, excluding mortgage payments;
- Tuition, related educational fees and room and board expenses for up to the next 12 months of post-secondary education for the participant or the participant's spouse, children, dependents or beneficiaries;
- Payments necessary to prevent the eviction of the participant from the participant's principal residence or foreclosure on the mortgage on that residence;
- Burial or funeral expenses for the participant's parents, spouse, children, dependents or beneficiaries; or
- Certain expenses to repair damage to the participant's principal residence.
Participants must first have taken all other permitted withdrawals and loans available from all plans maintained by the employer. A loan is not required if the burden of loan repayments would worsen the participant's financial situation. Participants are not permitted to make any contributions to any plan sponsored by the employer for at least six months after receipt of the hardship withdrawal.
The above mandated requirements are only applicable to salary deferrals. Some plans also permit hardship withdrawals from profit sharing and matching contribution accounts, which are permitted to have less restrictive hardship withdrawal requirements. To simplify plan administration, some plans apply the salary deferral rules to all accounts. Safe harbor employer contributions are not available for in-service distribution prior to age 59½.