Should employees take a hardship withdrawal from their 401(k)?
What HR needs to know about 401(k) hardship withdrawals
The IRS has recently proposed expanding 401(k) hardship withdrawals, which means it may be a good time for HR professionals to familiarize themselves with how these withdrawals work and what employers need to know.
A hardship withdrawal allows an employee to receive distributions from their 401(k) after experiencing an ‘immediate and heavy financial need’ associated with a few specific experiences. Not every 401(k) plan permits this, and employers are not required to choose a plan that does.
However, if your plan does permit hardship withdrawals, employees can withdraw funds — with penalties — after experiencing one of the following criteria:
1. Unexpected medical expenses
2. Costs related to purchase of principal residence
3. Preventing eviction from or foreclosure on principal residence
4. Funeral expenses
5. Tuition and related expenses
6. Repairing damage to principal residence
The proposed regulation would modify the expenses that qualify for distribution to also include any primary beneficiary under the plan for qualifying medical, educational or funeral expenses. It would also automatically include property loss in a federally-declared disaster area, but also specifies that residency damage does not have to be in a declared disaster area.
What HR should know
HR leaders should be sure to help employees understand that these withdrawals are subject to income taxes, and if the employee is younger than 59 and a half, a 10 percent withdrawal penalty. For these reasons, other paycheck assistance programs your employees might have access to may be a better fit.
In the event that an employee is eligible for and wishes to receive a hardship withdrawal, documentation is key, as HR may face liability in the event of an IRS audit. Be sure to keep records of hardship requests, proof of financial information and proof of distribution.
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