Like loans, hardship withdrawals are allowed by law, but your employer is not required to provide for them in your plan. Again, most companies do, but some don’t. The cost of administering such a program can be prohibitive for many small companies. Check with your Human Resources department if you’re not sure if your plan allows hardship withdrawal. Like loans, your employer must adhere to some very strict and detailed guidelines.
The IRS code that governs 401k plans provides for hardship withdrawals only if: (1) the withdrawal is due to an immediate and heavy financial need; (2) the withdrawal must be necessary to satisfy that need (i.e. you have no other funds or way to meet the need); (3) the withdrawal must not exceed the amount needed by you; (4) you must have first obtained all distribution or nontaxable loans available under the 401k plan; and (5) you can’t contribute to the 401k plan for six months following the withdrawal.
The following five items are considered by the IRS as acceptable reasons for a hardship withdrawal:
1. To purchase applicant’s principal residence
2. To prevent eviction from or foreclosure on applicant’s principal residence
3. To pay for college tuition expenses for applicant or family member
4. To pay medical expenses for applicant or family member
5. To pay funeral expenses for family member
Hardship withdrawals are subject to income tax and, if you are not at least 59½ years of age, the 10% withdrawal penalty. You do not have to pay the withdrawal amount back. For more information and examples of documentation necessary to receive a hardship, see the Hardship Withdrawal Request Form.