Finance News & Insights

401(k) hardship distributions: IRS clarifies what it deems OK

Now may be a good time to get your Payroll folks to take a closer look at your retirement plan’s hardship distribution procedures to see if they gibe with the feds’ standards.

That’s because the IRS just issued a memorandum on how it examines whether a 401(k) or 403(b) hardship distribution is “deemed to be on account of an immediate and heavy financial need” under the agency’s safe harbor standards.

In other words, the agency just laid out how it determines whether a hardship distribution was actually necessary.

While employers can’t use memorandums as official IRS guidance, they can serve as excellent reference points and give companies a clear example of how the feds are operating.

6 examples of ‘immediate and heavy financial need’

This memorandum in particular gives employers six very specific examples of when the hardship distribution is “… deemed to be on account of an immediate and heavy financial need” and OK by the IRS. The examples — which must be properly substantiated — of what the IRS considers an immediate and heavy financial need, include:

  • medical care for the employee or the employee’s spouse, children or dependents;
  • purchase of a principal residence;
  • payment of tuition, related educational fees, room and board expenses for up to the next 12 months of post-secondary education for the employee or the employee’s spouse, children or dependents;
  • payments necessary to prevent eviction of the employee from the employee’s principal residence or foreclosure of the mortgage on that residence;
  • payments for burial or funeral expense for the employee’s deceased parents, spouse, children or dependents; or
  • expenses for the repair of damages to the employee’s principal residence that would qualify for a casualty deduction.
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