The Pension consultants at Planmark regularly receive calls on a broad array of technical topics related to qualified retirement plans. A recent call with a plan sponsor in Atlanta is a commonly asked question about hardship withdrawals. The plan sponsor asked:
“I have a participant who wants to take a hardship withdrawal from the plan. Is there a special process that needs to be followed for this type of distribution?”
First, contact your third party plan administrator to determine if your plan provisions allow for a hardship withdrawal. The provision to allow withdrawals for a financial hardship is a plan sponsor election and not a requirement of ERISA.
If the plan allows it, the document may reflect very specific reasons for taking the withdrawal, such as for an immediate and heavy financial need, such as medical bills or to prevent an eviction from your home. It is up to the participant to demonstrate the hardship and that they have no other means to meet the need.
It will also specify the money types that it can be withdrawn from, possibly limiting the withdrawal to the employee deferral contributions. If there is a loan provision in the plan, the participant will most likely need to exercise this option before taking a hardship withdrawal.
Many plans will also suspend employee deferrals for six months from the date of the hardship distribution. It is important for the participant to understand this is a taxable event. They will owe federal income tax on the amount withdrawn plus the 10% excise tax on amounts withdrawn before age 59 1/2.
The Resource Desk is staffed by the pension experts at Planmark Financial Group, Inc., a third-party plan administration firm. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Planmark does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.