What Is a Hardship Distribution From a 401(k)?

A hardship distribution from a 401(k) retirement plan allows individuals to access their retirement savings before traditional retirement age. This option is a last resort for addressing an immediate and substantial financial need. It provides financial relief during a dire situation that cannot be met through other available means.

General Eligibility Requirements

Accessing funds through a hardship distribution requires meeting specific conditions. The primary criterion is demonstrating an “immediate and heavy financial need,” indicating a serious financial situation rather than a mere inconvenience. This need must be pressing and not something that can be delayed or covered by future income.

The distribution amount must be limited to what is necessary to satisfy this financial need. The individual must certify they have no other reasonably available resources, such as savings accounts, non-retirement investments, insurance, or commercial loans. Current regulations no longer require participants to take a 401(k) loan before requesting a hardship distribution.

A change in regulations, effective January 1, 2020, eliminated the requirement that participants be prohibited from making elective deferrals to their 401(k) plan for at least six months after a hardship distribution. This allows individuals to resume saving sooner. Additionally, while traditionally limited to employee elective deferrals, hardship distributions can now include earnings on those deferrals and certain employer contributions, depending on the plan.

Specific Qualifying Events

The Internal Revenue Service (IRS) defines specific “safe harbor” reasons that automatically qualify as an immediate and heavy financial need. While a plan is not obligated to offer hardship distributions, those that do must adhere to these established categories.

These qualifying events include:

• Medical care expenses for the participant, spouse, dependents, or primary beneficiary, if deductible under Internal Revenue Code Section 213. This includes costs for diagnosis, treatment, or prevention of disease.
• Costs directly related to the purchase of a principal residence for the participant, excluding mortgage payments.
• Educational expenses for post-secondary education for the next 12 months for the participant, spouse, dependents, or primary beneficiary, including tuition, fees, and room and board.
• Payments necessary to prevent eviction from the participant’s principal residence or foreclosure on its mortgage.
• Burial or funeral expenses for the participant’s deceased parent, spouse, dependents, or primary beneficiary.
• Expenses for the repair of damage to the participant’s principal residence that would qualify for a casualty deduction under Internal Revenue Code Section 165.
• Expenses incurred as a result of a federally declared disaster.

The Application Process

The application process for a hardship distribution begins after confirming eligibility and a qualifying event. First, contact the plan administrator or human resources department to learn about specific plan rules and obtain application forms. Each plan may have unique procedures.

Applicants must provide documentation to substantiate the financial need. This evidence could include medical bills, eviction notices, home purchase agreements, funeral statements, or educational invoices. Recent legislative changes allow employers to rely on a participant’s written representation of a qualifying financial need and no other available assets.

After gathering all required information, complete the application forms accurately. These forms typically require details about the hardship, the exact amount needed, and a certification of lacking other resources. Once submitted, the plan administrator reviews the request for compliance with IRS regulations and plan provisions.

If approved, funds are typically disbursed within 7 to 10 business days. This timeline can vary based on the plan administrator’s processing and disbursement method, such as direct deposit or mailed check. Confirm the expected timing with the plan administrator during the application process.

Tax Considerations

Taking a hardship distribution from a 401(k) has tax implications. Generally, the amount received is treated as taxable income in the year it is distributed. This means the funds will be added to the individual’s gross income for federal income tax purposes.

If the participant is under age 59½, the distribution is typically subject to an additional 10% early withdrawal penalty. Qualifying for a hardship distribution does not automatically exempt the withdrawal from this penalty; a separate IRS exception must apply. For instance, unreimbursed medical expenses exceeding 7.5% of adjusted gross income may qualify for an exception.

Hardship distributions cannot be rolled over into another retirement account, such as an Individual Retirement Account (IRA) or another qualified plan. This means the funds permanently leave the tax-advantaged retirement system. Plan administrators typically withhold federal income tax from the distribution. Individuals will receive a Form 1099-R for tax reporting purposes.