Under what circumstances can a participant take a hardship distribution?
A retirement plan may, but is not required to, provide for hardship distributions. A hardship distribution is one that is made while the participant is still an active employee. The employee must have an immediate and heavy financial need, have exhausted all other income sources, and use the distribution to satisfy the need. If a 401(k) plan provides for hardship distributions, it typically limits the reason for the distribution to the IRS safe harbors: medical fees, purchase principal residence, educational expenses, and to prevent eviction or foreclosure. In determining the existence of a need and of the amount necessary to meet the need, the plan must specify and apply nondiscriminatory and objective standards. While a hardship provision does provide flexibility, participants must be aware that these distributions are assessed income tax and a 10% penalty and contributions to the plan must cease for six months following the distribution.
