Can an Employer Deny a 401(k) Withdrawal?
Accessing your 401(k) funds depends on the plan's official rules, not an employer's choice. Learn the reasons a withdrawal request can be lawfully denied.
A 401(k) plan is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts. A withdrawal is any distribution of assets from that account. While many participants believe they have an unrestricted right to access their funds, this is a misunderstanding. A plan administrator can deny a withdrawal request under several circumstances, as the process is governed by federal law and the specific rules of the retirement plan. These regulations are designed to encourage long-term saving, so accessing funds early is subject to defined limitations.
The Role of the Plan Document
Every 401(k) plan is controlled by a legal document known as the plan document, which is the ultimate authority on all operations, including when and how participants can withdraw funds. The employer, as the plan sponsor, adopts this document and must operate the plan according to its terms to maintain its tax-qualified status. The plan administrator is the entity responsible for interpreting and applying these rules. This role may be filled by the employer or a third-party administration (TPA) firm, and the administrator has a fiduciary duty to follow the plan document meticulously.
While the Internal Revenue Service (IRS) establishes the maximum allowable flexibility for 401(k) plans, it does not mandate that all plans offer every available feature. An employer can choose to create a more restrictive plan that does not include options like loans or hardship withdrawals. Therefore, if your plan document prohibits in-service distributions (withdrawals while still employed), the administrator is legally bound to deny such a request.
The Summary Plan Description (SPD), a more reader-friendly version of the plan document, is required to be provided to all participants. This document should clearly outline the plan’s rules on distributions and is the first step in understanding your rights.
Allowable Withdrawal Events and Vesting Rules
Access to 401(k) funds is tied to specific “distributable events” defined by both the IRS and the plan document. The most common of these events is separation from service, which includes quitting, termination, or retirement. Other standard distributable events include the participant reaching age 59½, permanent disability, or death, at which point the funds become available to their designated beneficiary.
Some plans also permit “in-service” withdrawals, which allow access to funds while still employed. The most recognized type is a hardship withdrawal, which the IRS permits for an “immediate and heavy financial need.” A plan is not required to offer hardship withdrawals, but if it does, permitted reasons can include:
- Certain medical expenses
- Costs to purchase a principal residence
- Tuition and related educational fees
- Expenses to prevent eviction or foreclosure
- Certain funeral expenses
- Costs for certain repairs to a principal residence
Vesting determines your ownership of the funds your employer contributes, such as matching funds or profit-sharing. Your own contributions and any earnings on them are always 100% yours. Plans use one of two main vesting schedules: cliff vesting or graded vesting.
Under a three-year cliff vesting schedule, you have no ownership of employer contributions until you complete three years of service, at which point you become 100% vested. A graded schedule, which can last up to six years, grants you partial ownership over time, for example, 20% after two years of service and 40% after three, until you are fully vested. You can only withdraw the portion of your account that is vested.
Legitimate Reasons for a Withdrawal Denial
A plan administrator’s decision to deny a withdrawal request must be based on the established rules of the plan. One of the most straightforward reasons for denial is that the plan document simply does not allow for the type of withdrawal being requested. For example, if an employee requests a hardship withdrawal to purchase a car, but the plan does not permit hardship withdrawals at all, the denial is required.
Even if a plan allows a certain type of withdrawal, a request can be denied if the employee fails to meet the specific criteria. For a hardship withdrawal, the plan document may require that available plan loans must be taken first. If that condition is not met, the administrator must deny the hardship request.
Incomplete or insufficient documentation is another common reason for denial. When requesting a hardship withdrawal for medical expenses, for instance, the plan administrator can require copies of medical bills to substantiate the request. Failure to provide the necessary proof will result in the request being turned down.
A request will also be denied if it attempts to access non-vested funds. An employee who has not met the service requirement under a vesting schedule has no right to the employer’s contributions. A request to withdraw those funds will be denied because the money does not yet legally belong to the employee. Lastly, if an employee has an outstanding 401(k) loan, the plan may prohibit further withdrawals until the loan is repaid.
Navigating the Request and Appeal Procedure
Preparation
The first step is to identify the plan administrator, which is disclosed in the Summary Plan Description (SPD), and obtain the official withdrawal forms. These forms are specific to your plan and will detail the information required. You must also gather all necessary supporting evidence, such as itemized invoices for a medical hardship or an official notice from a lender to prevent foreclosure.
Procedure
The completed application and supporting documents must be submitted according to the plan’s instructions, which are often found in the withdrawal packet or the SPD. If your withdrawal claim is denied, you have a legal right to a formal appeal under the Employee Retirement Income Security Act of 1974 (ERISA). The denial notice you receive must explain the specific reasons for the decision and outline the plan’s appeal procedure. You must be given at least 60 days to file a written appeal, addressing the reasons for the denial and providing any additional evidence that supports your claim. The plan administrator is then required to conduct a full and fair review of the appeal.