How Does a PERA Hardship Withdrawal Work?

A Public Employees Retirement Association (PERA) hardship withdrawal allows active members to access their retirement funds when faced with a significant and immediate financial need. It is intended as a last resort after all other financial avenues have been exhausted. While the general framework for these withdrawals is guided by Internal Revenue Service (IRS) regulations, the specific rules and procedures are administered at the state level. Consequently, the exact requirements can differ between various PERA systems across the country.

Qualifying Reasons for a Hardship Withdrawal

To initiate a hardship withdrawal, a member must demonstrate an “immediate and heavy financial need” that aligns with specific circumstances, known as safe harbor events, recognized by the IRS. One common reason involves unreimbursed medical expenses for the member, their spouse, or dependents, for medical care as defined by the tax code.

Housing-related costs are another accepted reason. A member may withdraw funds for costs to purchase a principal residence, including a down payment, but not for mortgage payments. A withdrawal can also be authorized for payments to prevent eviction or foreclosure on a principal residence.

Educational expenses are a valid basis for a claim. Funds can be withdrawn for tuition, fees, and room and board for the next 12 months of postsecondary education for the member, their spouse, children, or dependents. These funds cannot be used to repay student loans.

A member can also request a withdrawal to cover funeral expenses for a deceased parent, spouse, child, or dependent. Additionally, funds may be accessed to repair damage to a principal residence if the damage qualifies for a casualty loss deduction, such as from a fire or natural disaster.

Required Information and Documentation

Applying for a hardship withdrawal hinges on providing thorough documentation to substantiate the financial need. The first step is to obtain the official Hardship Withdrawal Application form from the website of the specific state’s PERA. This form guides the documentation gathering process.

For each qualifying reason, a distinct set of documents is required:

• Medical expenses: Copies of unpaid medical bills showing the patient’s name, service provider, date of service, and amount owed.
• Purchase of a primary residence: A signed purchase agreement or settlement statement.
• Foreclosure or eviction prevention: The official, dated notice from the lender or landlord detailing the amount due and the deadline.
• Educational expenses: An itemized statement from the educational institution showing the student’s name and a breakdown of tuition and fees for the upcoming academic period.
• Funeral costs: A copy of the death certificate and the itemized funeral bill showing the member as the responsible party for payment.
• Home repairs: Copies of contractor estimates or insurance reports that detail the extent and cost of the damage.

After gathering the necessary proof, the member must complete the application. This includes specifying the exact amount of the withdrawal requested, which cannot exceed the documented financial need. The form also contains a section where the member must certify, under penalty of perjury, that the hardship is legitimate and that they have exhausted all other reasonably available financial resources.

The Application and Withdrawal Process

Once the application form is complete and all supporting documents are gathered, the member must submit the package to their PERA. Submission methods can include mailing physical documents or uploading digital copies through a secure online member portal.

After submission, the application enters a review period. PERA staff will verify the member’s eligibility and examine the documentation to substantiate the claimed hardship. Processing timelines can range from four to six weeks, and PERA may contact the member if additional information is needed.

PERA will communicate its final decision in writing, through mail or a secure message in the member’s online account. If the application is approved, the notification will specify the approved withdrawal amount. The disbursement of funds follows shortly after approval, with the member often having the choice between direct deposit or a physical check.

Tax and Account Consequences

A hardship withdrawal has significant financial repercussions. The amount withdrawn is considered taxable income by the IRS and must be reported on the member’s federal income tax return for the year it is received. Because these withdrawals are ineligible to be rolled over, they are not subject to mandatory tax withholding, and the recipient can choose how much federal tax is withheld.

For members under the age of 59½, the IRS imposes a 10% early withdrawal penalty on the taxable portion of the distribution. This penalty is in addition to the regular income tax owed. A member could see a substantial portion of their withdrawal go to taxes and penalties.

A hardship withdrawal is not a loan; the funds cannot be repaid to the account. This action permanently reduces the member’s retirement savings balance and diminishes the potential for future tax-deferred growth. This withdrawal may also lead to the forfeiture of service credit associated with the funds, which permanently reduces the pension benefit the member will receive in retirement.