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 Plan Audits. The plan sponsor asked:
“Can a 401(k) participant request a hardship distribution if the financial need is for a spouse or child of the participant?”
First you must read the Hardship Distribution section of the plan document that will specify the rules to follow for these kinds of distributions. It should describe for what purposes and whose expenses will qualify for the distribution.
Treasury regulations state…“The determination of the existence of an immediate and heavy financial need and of the amount necessary to meet the need must be made in accordance with nondiscriminatory and objective standards set forth in the plan.”
For those plans that follow the safe harbor or “deemed” definition of what constitutes immediate and heavy financial needs, several of the listed expenses can be expenses of the participant’s spouse, dependents and/or beneficiaries.
Qualifying expenses pursuant to the safe harbor reasons for hardship distributions are summarized below:
- Deductible medical expenses incurred by the plan participant, his or her spouse, dependents, or plan beneficiary
- Costs directly related to the purchase of the participant’s principal residence (but not mortgage payments)
- Tuition and related educational fees, such as room and board for the next 12 months for the participant, participant’s spouse, dependents, or plan beneficiary
- Necessary payments to prevent foreclosure on the mortgage of the participant’s principal residence or eviction from the participant’s home
- Funeral expenses for the participant, participant’s spouse, children, parents, dependents, or plan beneficiary
- Expenses to repair casualty damage to the participant’s principal residence
In addition to expenses incurred by a plan participant, certain expenses of a participant’s spouse, dependents and/or beneficiaries may qualify as expenses for a hardship distribution from a 401(k) plan. Check the plan document for specific language regarding hardship distributions.
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.