Can You Be Denied a Hardship Withdrawal?

A hardship withdrawal allows you to take money from a retirement plan, such as a 401(k), when facing a significant financial burden. It is an in-service withdrawal, meaning you access the funds while still employed. These distributions are not an entitlement and are governed by regulations from the Internal Revenue Service (IRS) and the specifics of your employer’s retirement plan. Approval is not guaranteed, as you must meet a specific set of criteria to qualify for access to your savings before retirement age.

Common Reasons for Denial

One of the most common reasons for denial is that the retirement plan itself does not permit hardship withdrawals. Employers are not required to offer them, so you must first confirm if your plan includes this provision. If the plan allows them, your reason for the request must align with the IRS definition of an “immediate and heavy financial need.”

Your request will also be denied if the need does not qualify under these rules. For example, using the funds to pay off general consumer debt or to purchase non-essential items like a boat would not be approved.

Another reason for denial is the failure to provide sufficient documentation to support your claim. Without the correct proof, the plan administrator cannot validate the hardship, leading to a rejection. This documentation must clearly demonstrate both the nature of the financial need and the specific amount required to resolve it.

Alternatives to Hardship Withdrawals

Recent legislation has created new penalty-free withdrawal options that your plan may offer as alternatives to a hardship withdrawal. One option is an emergency personal expense distribution, which allows for a withdrawal of up to $1,000 per year for unforeseeable or immediate family needs. Another provision allows victims of domestic abuse to withdraw up to $10,000 or 50% of their vested balance, whichever is less. These distributions are not subject to the 10% early withdrawal penalty and can be repaid to the plan within three years.

Substantiating Your Financial Need

To receive an approved hardship withdrawal, you must substantiate that you have an “immediate and heavy financial need.” The IRS provides a “safe harbor” list of events that automatically meet this standard:

• Certain medical care expenses for you, your spouse, dependents, or a primary beneficiary.
• Costs directly related to the purchase of your principal residence.
• Tuition and related educational fees for the next 12 months of postsecondary education.
• Payments necessary to prevent eviction from or foreclosure on your principal residence.
• Burial or funeral expenses for your spouse, dependents, or primary beneficiary.
• Costs for repairing damage to your principal residence.

For each of these situations, specific documentation is required. For medical needs, you would need to provide invoices from the healthcare provider, while a tuition request would require a bill from the educational institution. A home purchase requires a copy of the real estate contract.

The amount you request cannot exceed the actual cost of the financial need. Your documentation must support the dollar amount being requested, including any amounts necessary to pay taxes resulting from the distribution. Furthermore, you will be required to provide a written statement certifying that you have insufficient cash or other liquid assets reasonably available to satisfy the financial need.

The Application and Review Process

Once you have gathered all necessary documentation, you must use your plan’s official hardship withdrawal form, which can be obtained from your HR department or through an online portal managed by the plan’s recordkeeper. The completed form and all supporting documents are then submitted to the plan administrator for their review.

The plan administrator is tasked with reviewing your application to ensure the request complies with the terms of your company’s retirement plan and IRS regulations. They will verify that the reason for the withdrawal is a qualifying event and that the documentation adequately substantiates the amount of the financial need.

After submission, the review process takes from a few days to a couple of weeks. The decision will be communicated to you through the method outlined by your plan, such as an email or a formal letter. If your request is denied, the notice will explain the reason for the decision.