What Are the New 401k Hardship Withdrawal Rules?
Recent rule changes make accessing your 401(k) for a financial need less burdensome. Understand the practical implications of these new flexibilities.
A 401(k) hardship withdrawal is a distribution from a retirement plan triggered by an immediate and heavy financial need. These withdrawals provide a way to access retirement funds before the standard retirement age to handle financial challenges. The SECURE 2.0 Act, a piece of retirement legislation, has introduced updates to these rules to offer more flexibility.
Key Changes to Hardship Withdrawal Rules
Participant Self-Certification
An update under the SECURE 2.0 Act gives plan administrators the option to rely on a participant’s self-certification for a hardship. A plan may permit an individual to state in writing that they have a qualifying event and the funds are necessary, without submitting extensive documentation upfront. Plans may still choose to require proof, such as medical bills or eviction notices, and participants should retain their own records supporting the claim.
Elimination of the Loan Requirement
Previously, many 401(k) plans required participants to first take a loan from their own account before they could be approved for a hardship withdrawal. The new rules eliminate this mandate. Participants are no longer forced to take a plan loan first, which simplifies access to funds.
No Contribution Suspension
Another change is the removal of the mandatory six-month contribution suspension. Previously, plans could prohibit employees from contributing to their 401(k) for six months after a hardship distribution, hindering their ability to save and causing them to miss employer matching contributions. Now, employees can continue contributing to their retirement accounts without interruption.
Inclusion of Earnings
Hardship withdrawals can now be sourced from a wider pool of funds. The new rules permit distributions to include not only the employee’s own contributions but also the earnings on those contributions. This change can provide access to a larger sum of money if needed to cover the financial emergency.
Qualifying Hardship Events
The Internal Revenue Service (IRS) provides a “safe harbor” list of events automatically considered an immediate and heavy financial need, which simplifies the qualification process.
- Certain medical care expenses for the employee, their spouse, dependents, or primary beneficiary.
- Costs directly related to the purchase of a principal residence for the employee, excluding mortgage payments.
- Tuition, related educational fees, and room and board for the next 12 months of postsecondary education for the employee, their spouse, children, or dependents.
- Payments needed to prevent eviction from or foreclosure on the employee’s principal residence.
- Burial or funeral expenses for the employee’s deceased parent, spouse, children, or dependents.
- Expenses for the repair of damage to the employee’s principal residence that would qualify for a casualty deduction under the tax code.
The Hardship Withdrawal Process
The first step is to contact your 401(k) plan administrator to request the necessary forms and instructions for a hardship withdrawal application. This contact information is found on account statements, the plan’s online portal, or through your employer’s human resources department.
Upon receiving the application, you will need to complete it with personal details and information about the nature of the financial hardship. After completing the form, it must be submitted according to the plan administrator’s instructions.
Processing times can vary but often take several business days. Once approved, the funds are disbursed through direct deposit or a check. These distributions are subject to ordinary income tax, and an additional 10% tax may apply if you are under age 59½. Mandatory tax withholding is not required, but you can choose to have federal and state taxes withheld.
New Emergency Withdrawal Options
The SECURE 2.0 Act introduced new withdrawal types distinct from traditional hardship withdrawals. One is an emergency withdrawal for unforeseeable financial needs, allowing a penalty-free withdrawal of up to $1,000 once per calendar year. While not subject to the 10% early withdrawal penalty, income tax still applies. Participants can repay this amount within three years and cannot take another such distribution for three years unless the original is repaid.
A separate provision assists victims of domestic abuse, permitting a penalty-free withdrawal of up to $10,000 or 50% of their vested account balance, whichever is less. The participant must self-certify they have been a victim of domestic abuse by a spouse or domestic partner. This distribution is subject to income tax but not the 10% penalty. It can also be repaid within three years, which allows the participant to recover taxes paid on the distribution.